One of the first and most important decisions facing a new business is choosing the right organizational structure. Owners must take into consideration factors such as, taxes, personal liability, and complex business formalities. There are several types of business structures, and the most common types are discussed below.
The sole proprietorship is a business owned and operated by a single individual. There are no filings required to form a sole proprietorship, it simply forms when an individual engages in business for profit. The sole proprietorship is not a separate legal entity, so the owner and the business are essentially the same person. This means that profits are taxed as the owner’s income. Also, this means that the owner is responsible for all the liabilities of the business.
North Carolina defines a partnership as “an association of two or more persons carrying on as co-owners a business for profit.” N.C. Gen. Stat. § 59-36. The general partnership is very similar to a sole proprietorship. It is treated the same for tax and liability purposes, and it is the simplest structure to form with two or more owners because it requires no formal documentation. General partnerships are usually controlled by a partnership agreement, but if no partnership agreement exists, then the Uniform Partnership Agreement (UPA) controls all issues such as, sharing profits and losses, rights in partnership property, and voting.
A corporation is a separate legal entity distinct from its shareholders. Unlike a sole proprietorship and general partnership, the personal liability of its shareholders is limited with some exceptions. In North Carolina, corporations are formed by filing articles of incorporation with the secretary of state, and they must also file an annual report and filing fee. Corporations are governed by their bylaws as well as the Model Business Corporation Act (MBCA). Because a corporation is a separate entity, profits are typically taxed at both the corporate level and the individual level. A corporation must observe certain corporate formalities such as, maintaining a board of directors, distributing dividends, and holding annual shareholders meetings. In exchange for the complexities of the business structure, the corporation offers limited liability to its shareholders.
Limited Liability Company
A limited liability company (LLC) has similarities with the general partnership and the corporation. The LLC is a pass-through tax entity, like a general partnership, and it also limits the personal liability of its members. An LLC is generally governed by statute and the terms of its operating agreement. Like a corporation, an LLC is formed by filing articles of organization with the Secretary of State, and it must file an annual report and filing fee. Also, the members of the LLC must treat the LLC as a separate legal entity or risk losing the limited liability protection.
Choosing the right structure is essential for your business. As every business is unique, there is no one size fits all structure. The attorneys Asheville Legal are well equipped from experience in business formation to help you with one of the most important decisions you will make when starting your new business. Give us a call today if you need help choosing the right structure for you.