Organizational
Structures
Businesses may be structured in a variety of ways, each
with its own advantages and disadvantages. Following is a brief overview of some
of the more common business structures. The Secretary of State's Office
strongly recommends that you consult with an attorney, accountant, financial
adviser, and/or banker to help you determine which structure best suits your
needs.
An assumed business name means any business name other than
the full, true, and correct name of a person. An assumed business name must be
distinguishable on the record from an assumed business name that is already
registered or from any corporate name, limited partnership name, limited
liability company name, limited liability partnership name, trademark, or
service mark registered or reserved with the Secretary of State.
Individuals who choose to own a business under an assumed business name can
register the name and declare that they are sole proprietors. A sole
proprietor is a business owned personally by one owner. A married couple cannot
file as a sole proprietor when filing an assumed business name.
An assumed business name can be used by:
- a sole proprietor,
- a corporation,
- a partnership,
- a limited partnership,
- a limited liability company,
- a limited liability partnership, or,
- an association.
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This type of business is owned by a single individual. A sole proprietor has total control of and
responsibility for his or her business, receives all profits, and can make important
decisions quickly. The sole proprietor is also responsible for all taxes and
liabilities of the business.
If you plan to start a sole proprietorship and you are not
planning to do business under your own name, you must file an
Application for
Registration or Renewal of Assumed Business Name with the Secretary of State's Office.
Otherwise, no registration is required. You must obtain any necessary state and
local business licenses.
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A partnership is an association of two or more people
acting as co-owners of a for-profit business. Individuals may create a
partnership by oral or written agreement. Under this arrangement, the partners
share personal liability for all claims against the partnership, as well as
share all profits and losses. Profits are taxed as personal income for each
individual partner.
A partnership agreement is generally maintained by the
partnership itself. However, if you choose, you may file a partnership agreement
with the Secretary of State's Office. There is a $20 filing fee.
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A limited partnership is more closely regulated than a
general partnership. There must be at least one general partner who manages the
business and who is fully and personally responsible for claims against the
business. In addition, there are investors who play no part in the management of
the business and whose liability for the business is limited to the extent of
their investment.
Limited partnerships must file a
with the Secretary of State's Office.
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A limited liability partnership operates much like a
general partnership, except none of the partners can be held personally liable
for claims against the business. Partners are not liable for the errors or
negligence of the other partners or their employees unless they themselves are
supervising, directing, or involved in the action for which a claim has been
filed.
As with a general partnership, profits are taxed as
personal income for each individual partner.
To start this type of business, you must file an
Application for Registration or Renewal of a Limited Liability Partnership with the
Secretary of State's Office, and you must make reference to this status in
your business name.
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A corporation is a more complex form of business
organization. It exists apart from its owners or shareholders and is a legal
entity in its own right. As a separate entity, it has its own rights,
privileges, and liabilities apart from the individuals who form it.
A corporation has shareholders who invest money in the
business and therefore own it. The shareholders hold an annual meeting at which
they elect a board of directors. The board makes policy decisions for the
company and selects the corporate officers who manage the company's daily
affairs.
A corporation affords limited liability to its shareholders
and can continue on after the death of or transfer of shares by one or more of
the owners. A corporation pays taxes on its profits, and its shareholders pay
taxes on dividends.
There are several types of corporations; some operate for
profit and others are not for profit. An attorney can advise you as to which
type best suits your needs.
Among these types are:
- S
corporations. These generally do not pay taxes. Profits or losses are
passed on to the individual shareholders' gross incomes for tax purposes.
You must apply to the Internal Revenue Service to get S corporation status.
The IRS places limits on who can be a shareholder.
- Statutory
close corporations. This type of structure allows a business to
eliminate many of the formalities of a standard corporation. For example,
the business can elect to operate without a board of directors. A
shareholder of a statutory close corporation may not sell his shares in the
business without the approval of the other shareholders. You must file
Articles of Incorporation with the Secretary of State's Office.
- Nonprofit
corporations. These are established solely for the benefit of
charitable, religious, educational, or scientific purposes. No earnings are
distributed to members, trustees, officers, or other individuals, except for
compensation for services rendered. A nonprofit corporation is exempt from
income tax. You must apply to the IRS for nonprofit status, and you must
file Articles of Incorporation with the Secretary of State's Office.
A nonprofit corporation may take
one of three forms:
1) A public benefit corporation operates for public
or charitable purposes. Members may not sell their interests or receive
distributions from the organization.
2) A mutual benefit corporation
exists to serve its members. Trade associations, social clubs, and fraternal
organizations are examples of this type of nonprofit. Members are given broader
voting rights and, while not entitled to receive distributions while the
organization is operating, they are entitled to sell their memberships and
receive distributions when the organization dissolves.
3) A religious
corporation is treated much like a public benefit corporation.
- Professional
corporations. Individuals who are licensed in certain professions may
form a professional corporation. This provides them with the benefits of a
corporate structure for the business aspects of their practices while
preserving the personal and professional relationship between them and the
clients they serve. Shareholders may only be people who are licensed to
render the specific professional service; at least half of the officers and
directors must also be licensed. A professional corporation must file
Articles of Incorporation with the appropriate professional licensing
entity.
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This form of business offers both the protections from
personal liability of a corporation and the favorable tax treatment of a
partnership. It provides for flexibility in the contribution and distribution of
assets.
Under this type of structure, you need not hold annual
meetings, but you do need to file Articles of Organization and annual reports
with the Secretary of State's Office.
Professional limited liability companies have the same
requirements as professional corporations (see above).
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