Types of Business Ownership and Legal Structures

What Are the Types of Business Ownership?

There are few things as exciting—and terrifying—as owning your own business. It’s hard work, but nothing is quite as rewarding as being your own boss. But like all good things in life, owning your own business is a lot of work. Even if you have a great idea, it can be incredibly discouraging just to figure out where to start.

If you’re feeling overwhelmed and need to find the way forward, we have your back. As a community-focused credit union, we have a wealth of experience helping small business owners just like you get their ideas off the ground. Let’s not get ahead of ourselves, though. Before we dig into exactly how we can help you, it’s important we cover some of the basics. Let’s talk about the different kinds of business ownerships, along with how a business membership with us can help you.

Sole Proprietorship

A sole proprietorship is the most basic business structure available to business owners. Simply put, a sole proprietorship establishes you as the individual responsible for the finances of the business. Your business isn’t considered a separate legal entity, but an extension of you. You get paid directly through the business, and you’re responsible for any debts the business might incur. Sole proprietorships are popular for their simplicity, allowing individuals with smaller-scale businesses to operate while avoiding some of the more complicated steps that come along with different forms of ownership.

In order to set up a sole proprietorship, all you need to do is obtain any appropriate business permits and register with the secretary of state. Likewise, registering for a business membership with Rivermark for your sole proprietorship is as simple as it can be. All we need is your registration with the secretary of state and employer identification number. Then we’ll be able to organize any accounts and investments to help get things going.

Partnership

While some companies can operate with just one owner (sometimes even just one employee), they are more often the exception than the norm. More often than not, a business will have multiple people coming together in the endeavor. If you’re forming a business with one or more additional people, you may want to form an official partnership.

There are many different kinds of partnerships reflecting the different roles and levels of involvement each partner has in the business. At the end of the day, it’s an agreement between two or more parties to work together to run a business and share in its profits and liabilities.

Signing up for business membership at Rivermark for a partnership is quite easy. All you need to give us, in addition to your registration and employer identification number, is a copy of your partnership agreement, and we can start helping you keep your books in order.

Limited Liability Company (LLC)

Limited liability companies, more commonly known as LLCs, are more of a hybrid form of business ownership. Basically, by working more with your state and any partners you may have, you may gain some of the benefits and protections a corporation has without losing the flexibility of a basic partnership or sole proprietorship.

The main benefit people seek to gain from forming an LLC is liability protection. With an LLC in place, your business and you are seen as distinct entities in the eyes of the law. This means you and any other owners aren’t personally responsible for the company’s debts, allowing for a degree of separation between your personal finances and your business ones. If you want to form an LLC but are a bit lost on how the finances work, don’t worry. We’re happy to offer a business membership that will help clarify things and take some of the stress off your plate.

Corporations

You’ve no doubt heard the term “corporation” before, but what does it mean in terms of business ownership? In short, it’s an independent business entity formed in order to take on the liabilities of the company. That means that the business itself, not the people who own it, is responsible for its actions and finances.

Traditional corporations (or C corps) also come along with more legal work and administrative fees, meaning they’re more common with larger companies. When creating a corporation, prospective shareholders pool resources to create the company’s capital. Those shareholders are considered owners of the company, but since the corporation is a separate taxpaying entity, these owners are shielded from its actions.

While it’s unlikely most people will ever have a hand in creating or operating a C corp, it’s possible you may end up with an S corp. An S corp is a special kind of corporation wherein a company is created in order to help pass along income and tax credits through to the shareholders. S corps are typically used to help business owners obtain some of the benefits that larger corporations enjoy while still operating on a smaller scale.

They provide liability shielding, accounting clarification, the ability to charge things to a company and write off business expenses, and most importantly, prevent the owners from being taxed twice on the same income. Depending on how quickly your business scales up, you may find an S corp to be a great way to help keep your back end running as efficiently as possible.

Nonprofit

By definition, nonprofits aren’t owned in the same way a for-profit business is owned. Your organization is going to feel and operate differently than most others, but it still needs to have a clear and organized structure in order to function. Most nonprofit companies operate on something similar to a corporate structure, wherein the company is a legally distinct entity that reports to an external group. In a traditional corporation, that group would be made up of the shareholders. As a nonprofit, though, things work a little bit differently.

Since there aren’t profits being passed along to shareholders, most report to a board of directors or trustees. It’s this group that legally owns the business and is responsible for ensuring the company complies with the law and maintains its original purpose. Just because your bottom line isn’t about profit, that doesn’t mean you can’t have impeccable business finances. We’re proud to work with companies so dedicated to their cause and can offer you business memberships to help you achieve your goals.

Whatever stage you are at in forming your business, we’re here to help with whatever financial questions you might have. Every company is different, and we’re committed to tailoring your business membership with Rivermark to your unique needs. So whether you’re just starting out or you’re itching to open your doors, get in touch. We can’t wait to hear from you.

Determining the Legal Structure of Your Business

You're ready to establish your business - congratulations! One of the first important decisions you'll need to make is how you want to structure your business.

Many things are determined by the legal structure of your business. The things to consider are:

• Tax implications

• Legal liability

• Expense of starting the business and ongoing administration

• Future needs of the business including the addition of new owners and ability to issue stock

We've put together information on each type of business structure to help you make the right decision for your business needs.

Sole Proprietorship

The simplest to form of the business structures, a sole proprietorship generally has just one owner, who is personally liable for the business. This means that the owner is responsible for any business debt, and their personal assets can be seized if debts are not paid. The owner declares any income from the business on their personal taxes.

Partnership

Similar to a sole proprietor, the owners of a partnership business are held liable for the business. The difference is that there can be more than one owner. The benefit of creating a partnership is having a blend of expertise and also splitting the risk with another person. A partnership can be easily formed without formal agreements, but it is suggested that a partnership agreement that clearly defines how profits are divided is created.

C Corporation

Most large businesses register as C Corporations. In the case of a C Corp, owners are not personally liable and the business operates legally separate from owners. Because of this, registering for a C Corporation can be costly and complicated. Many people do this to minimize risk and liability. Subject to double taxation, the company, as well as the owners, must pay taxes on profits. Must abide by state corporate law.

S Corporation

Designed for small businesses, an S corporation shields owners from legal liability but are not subject to the same double taxation that C Corporations are. This benefit comes with a high legal and tax cost. There are limits to the number of shareholders, and must stay within specified guidelines to qualify. Because of this, there tends to be a higher legal cost to an S Corp.

Limited Liability Company (LLC)

Considered a mix between a corporation and a partnership, an LLC is considered the most tax-effective option. An LLC can have one or several owners, and those owners have limited legal liability, like a corporation. A single-owner LLC is not subject to double taxation as the owner files the business income on his or her personal tax return.

Here is a brief summary of what to expect with each structure:

The Small Business Administration has more resources to help you determine the correct structure for your small business. You may also speak with a tax advisor for additional direction.

If you have further questions, our Business Advocates are here to help. Give us a call at 503.626.6600 or 800.452.8502.