Our firm provides a wide variety of services to our business clients from assisting in selecting the type of organizational entity under which to operate, preparation of agreements, directors' and officers' liability, dissolution, franchising, reorganization, trade association membership and activity, joint ventures, mergers, acquisitions, divestitures, business successions, and shareholders' rights.
Types of Business Entities
There are advantages and disadvantages to each of the legal forms of business you may choose. As an entrepreneur you must examine all of the characteristics and consult a knowledgeable legal professional when considering the formation of your business. There are three principal kinds of business structures: the sole proprietorship, the partnership, and the corporation.
1. Sole Proprietorship
Most small businesses operate as sole proprietorships. This is the simplest form of organization and allows the single owner to have sole control and responsibility. Some advantages of the sole proprietorship are less paperwork, a minimum of legal restrictions, owner retention of all the profits, and ease in discontinuing the business. Disadvantages include unlimited personal liability for all debts and liabilities of the business, limited ability to raise capital, and termination of the business upon the owner's death.
You should note that a small business owner might very well select the sole proprietorship to begin. Later, if the owner succeeds and feels the need, he or she may decide to form a partnership or corporation.
2. General Partnership
A partnership is similar to a sole proprietorship except that two or more people are involved. Advantages are that it is easy to establish, can draw upon the financial and managerial strength of all the partners, and the profits are not directly taxed. Some disadvantages are unlimited personal liability for the firm's debts and liabilities, termination of the business with the death of a partner, and the fact that any one of the partners can commit the firm to obligations.
The partnership is formed by an agreement entered into by each partner. This agreement may be informal, but it is advisable to have a written agreement drawn up between all parties. While no filing is required to form a general partnership, it may be required to file a fictitious name registration. Refer to the section in this guide on How to Register Your Business Name.
3. Limited Partnership
A limited partnership is a partnership formed by two or more persons having one or more general partners and one or more limited partners. The limited partners have limited exposure to liability and are not involved in the day-to-day operations of the limited partnership.
4. Limited Liability Company
The limited liability company (LLC) is a hybrid between a partnership and a corporation, providing the liability protection of a corporation, with the advantage of being treated as a partnership.
5. Limited Liability Partnership
A limited liability partnership (LLP) is an existing partnership that files an election with the Department of Business Services Limited Liability Division, Illinois Secretary of State, claiming LLP status. The effect of becoming a LLP is to provide general partners with additional protection from liability.
A corporation is the most complex form of business organization. It is costlier and more difficult to create because of the paperwork required. Business activities are restricted to those listed in the corporate charter. However, most corporations list a general-purpose clause.
Advantages of a corporation are that liability is limited to the amount owners have paid in to their share of stock, and the corporations continuity is unaffected by the death or transfer of shares by any of the owners. Some disadvantages are extensive record keeping, close regulation, and double taxation (taxes on profits and taxes on dividends paid to owners).
7. S Corporation
Closely held corporations may elect to be taxed as federal or state S corporations, which permit shareholders to pay taxes on corporate net income personally, as if it were a partnership. S corporation status is limited to corporations that have no more than 75 shareholders.