As an entrepreneur who wants to set up your own business, one decision that you have to take is decide on the business structure. Speak to an experienced Midway, Utah Corporate lawyer for assistance. There are different business structures and each has its own benefits. If you already have a business and you need help with your LLC, corporation or nonprofit, you can give Ascent Law LLC a call as wall. We’re happy to help you.
Sole Proprietorship
This is probably the simplest form of business structure and is the one often chosen by the individual entrepreneur for the start-up and subsequent operation. From a tax standpoint, the profit from the business is included with the owner’s individual return on Schedule C and is taxed at whatever rate applies to the owner’s personal tax situation. While a very straightforward form of business structure, it has the drawback of offering no personal liability protection. The personal assets of the owner are exposed to litigation against the business, thus increasing this aspect of financial risk.
The business is the responsibility of one person. No other members of the business have any legal arrangement. The individual and the firm are one.
Partnerships
Where more than one individual is involved in the ownership of a business, a sole proprietorship is probably not appropriate and a partnership may be the appropriate business structure. Here again, profits of the business are reported and taxed as part of the owners’ income. The partnership itself pays no tax, but does file an information return. Liability for damages can extend to the partners’ personal assets, although there is protection for some in limited partnerships. A crucial element in any partnership is the careful preparation of the partnership agreement, spelling out profit-sharing and decision-making approaches.
A partnership requires two or more practitioners to provide architectural services. The business entity is not separate or distinct from the partners. In a partnership, each individual (partner) is liable for all of the business and professional debts of the entire partnership, and each partner’s assets may be available for claims.
It is preferable to establish a partnership with a specific written document. Items, which should be understood by each partner and written in the agreement, take into account each partner’s position in the firm regarding income, loss exposure, and individual partner contributions.
Corporations
Certainly the business structure of choice for large, established businesses, the corporate structure can be, and is, applied to small or medium-sized businesses, particularly where a number of owners or stockholders are involved. The corporate form is generally thought of as providing protection for the personal assets of the owners in the event of a judgment against the corporation arising out of litigation. While General Motors or Dow stockholders may be concerned with large damage awards, the concern is related to the performance of the corporation and not to the security of their personal assets. It should be noted, however, that in the case of small businesses or start-ups, lending agreements may require that at least a part of the owners’ personal assets be placed at risk, thus negating some of the protection traditionally ascribed to a corporate business structure.
Another significant characteristic of the corporate business structure is the potential for double taxation of profits. As most stockholders of large companies are painfully aware, corporate profits are taxed at the applicable corporate income rate, and then dividends paid from those profits to the owners or stockholders are again taxed on the stockholder’s personal federal and state returns.
Because of these drawbacks to the conventional corporate business structure, there has been developed a modified structure known as an S-type corporation. This is primarily applicable to smaller businesses and is limited to those with thirty-five or fewer stockholders. The S corporation retains the liability protection provided by the conventional corporation but permits the distribution of profits without their being taxed at the corporate level, thus eliminating the problem of double taxation.
A business structure known generally as a Limited Liability Company, or LLC, has become a very popular choice in many states including Utah. With registration and administration requirements simpler than those for an S-type corporation, the LLC still, as the name implies, provides the owners with protection of their personal assets.
Corporations are separate legal entities with independence under the law. The corporation is a complicated business structure when compared to a proprietorship or partnership. There are legal requirements for boards of directors, income-tax preparation, corporate minutes, and state-by-state reporting regulations. The corporation does create its own entity, perpetual life, which transcends the individual leadership. The corporation exists as a legal independent entity. It can hold and convey property and sue or be sued in its corporate name. Management is centralized in the board of directors, usually independent overseers. The corporation can transfer interests and limit shareholders’ liability.
Franchise
At the close of the nineteenth century, franchising was still in its infancy. Companies clearly recognized the limitations of the agency system as a method of distribution for complex brand-name goods in the national market. They modified agency sales to suit their needs, but none of the firms using various modifications of the agency system fully understood the potentials of franchising. Similarly, the courts had yet to recognize that the rise of big business had substantially changed the nature of the relationship between large firms and their sales representatives. The full impact of these alterations would become more apparent as large firms gained greater experience in selling nationwide through outlets they did not directly own. In the twentieth century, the burgeoning automobile industry led to the fuller development of franchising.
Once franchising became a desirable tool for building a brand identity for generic goods, the stage was set for the expansion of business-format franchising. The owner of a business-format franchise bought not only the right to sell a manufacturer’s product but also a complete package of services that typically included a fully equipped outlet, training, continued advice, and regular assistance in virtually all areas of operation. This, in turn, led to the situation where the franchise became a product in its own right and ultimately to the creation of a franchise industry where the franchise holder was the customer and the opportunity for business success was the product.
A franchise is a business that uses a parent company’s name to sell a product while maintaining a degree of independence from the parent. The parent company is called the “franchisor,” and the person opening one of these satellite firms is the “franchisee.” To set up a franchise, a franchise contract is drawn up between the franchisor and the franchisee. This contract specifies quality standards for the product, service standards for management and employees, and the financial conditions under which the franchise is formed and operated. The franchisor, after all, must be certain that its reputation is protected as the franchise chain expands.
A franchisee takes certain business risks, just like other entrepreneurs do. But thousands of entrepreneurs have chosen to set up shop as independently owned and operated franchises. For example, there are tens of thousands of gas stations operating under parent companies such as Mobil, Getty, and Citgo. Many thousands of franchisees have also entered the fast-food industry under such familiar names as McDonalds, Burger King, Wendy’s, KFC, Subway, Taco Bell, and Domino’s Pizza. You might be interested in becoming a franchisee one day. Before you sign a franchise contract, consider the advantages and disadvantages of this type of business organization.
One advantage is that franchises are fairly easy to organize. Like other businesses, the franchisee must abide by local zoning rules. Negotiating the specific terms of your contract with the franchisor should also be a routine task because the franchisor, most likely, has a standard set of expectations for all franchisees who join the franchise chain. As an added bonus, your creditworthiness typically gets a boost from being associated with a major franchise chain such as McDonald’s, Radio Shack, or H&R Block. The franchisor may even help you finance the start-up costs for your business. This is important because the range of start-up costs runs from thousands of dollars to hundreds of thousands of dollars.
Secondly, franchisors offer technical assistance to franchisees. This type of assistance includes the training of a franchisee in effective management techniques, linking the franchisee with suppliers of materials or resources that are needed in production, and so on. And you are still the boss, entitled to the same inner satisfaction felt by successful proprietors or partners.
A third advantage is immediate name recognition. Franchisors spend freely on national advertising and marketing for their product line. The purpose of this advertising is to promote sales for the entire franchise chain, and you benefit from this publicity.
One disadvantage is your obligation to pay a franchise fee to the franchisor. “Franchise fees” vary from firm to firm, but the dollar amount– which could be measured in a percentage of the franchisee’s profits–is clearly stated in your franchise contract. These fees, coupled with the start-up costs, represent a considerable sum of money.
Finally, the stability of the business falls on the back of the franchisee. In this respect, the franchisee shares a burden similar to that of the sole proprietor. What would happen to the firm if the franchisee suffered from a prolonged injury or sickness? As was the case with all other types of businesses, there are no guarantees of success.
Other Forms
Two additional types of businesses also have an important role to play in the U.S. economy: cooperatives and nonprofit organizations. One feature of these types of business organizations that immediately stands out is that they are not organized to earn profits! This sets them apart from all other types of businesses where profit is the primary motive for their existence.
Cooperatives
A cooperative, or co-op, is a voluntary association of people that conducts a business activity to serve its members rather than reap a profit. Members of co-ops usually belong to a group, such as producers within a certain industry, workers in a labor union, or the like. In addition, members of co-ops are usually required to pay a small fee to join the co- op. Co-ops exist all around us. For example, a food co-op allows members to shop at the co-op store, where prices for some food items are lower than those at supermarkets. Agricultural co-ops help members negotiate better prices for their output. Financial co-ops, such as credit
unions, permit members to deposit and borrow money, write checks (called share drafts), and conduct other financial transactions. You may even bump into a consumer co-op at college. Many bookstores on college campuses are organized as student co-ops.
Nonprofit Organizations
Nonprofit organizations provide important services to people, but do not do so for profits. Because they do not seek profits, issue stock, or pay dividends, they are exempted from paying taxes to Uncle Sam! Many groups involved in charitable, humanitarian, or community service activities are nonprofit organizations. Examples include the American Red Cross, the Cancer Society, and the Boy Scouts and Girl Scouts of America. It may seem strange to think of these organizations as “producers,” but they all use resources to provide goods and services. And while profit is not their incentive to produce, the fact that they continue to thrive–mainly on voluntary donations–hints that Americans value what they produce.
Insurance
Many businesses are required to carry some forms of insurance, such as workers’ compensation. Other types of insurance, particularly liability insurance, may not be required, but are generally advisable. In the case of a sole proprietorship or partnership, such a policy may protect the entrepreneur from losing personal assets. In the case of a corporation, such a policy may protect the firm’s assets. There may be a number of other types of coverage which you should also consider.
Meeting Government Requirements
Different municipalities and counties have different requirements for starting a business and different agencies to administer those requirements. Local ordinances might also require that particular types of businesses, for example those working with food, be licensed. The federal government also has regulations. The legal requirements that will affect the business should be evaluated before the business opens its doors.
An experienced Midway, Utah corporate lawyer can help you decide on the best structure for your business.
Free Consultation with a Utah Business Lawyer
If you are here, you probably have a business law issue you need help with, call Ascent Law for your free business law consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
