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Examining Legal Structures for Your Business

When you start a new business, you must choose a legal structure for it. No business legal structure is inherently better than another legal structure; you just need to decide which one is right for your particular business:

  • Corporation: The law views a corporation as a real, live person. Like an adult, a corporation is treated as a distinct and independent individual who has rights and responsibilities. A corporation must have a legal name. An owner's personal assets are completely separate from the corporation's assets, which means that (except in cases of fraud) if the corporation can't pay its creditors, those creditors can't dip into your personal assets to pay off the company's debts.

  • Partnership: A partnership is also called a firm. The term firm connotes an association of a group of individuals working together in a business or professional practice. Partnerships differ from corporations with respect to owners’ liability. A partnership’s owners fall into two categories:

    • General partners: Subject to unlimited liability. General partners have the authority and responsibility to manage the business.

    • Limited partners: Limited partners aren't responsible, as individuals, for the liabilities of the partnership entity. These junior partners have ownership rights to the business’s profit, but they don’t generally participate in the high-level management of the business.

  • Limited liability company (LLC): An LLC is like a corporation regarding limited liability, and it’s like a partnership regarding the flexibility of dividing profit among the owners. An LLC’s key advantage is flexibility — especially regarding how profit and management authority are determined.

  • Sole proprietorship: The business arm of an individual who has decided not to carry on his or her business activity as a separate legal entity. This is the default when you don’t establish a legal entity.

    As the sole owner (proprietor), you have unlimited liability, meaning that if your business can’t pay all its liabilities, the creditors to whom your business owes money can come after your personal assets.

  • Business cooperative: A cooperative pays its customers patronage dividends based on its profit for the year — each customer receives a year-end refund based on his or her purchases from the business over the year. To shop in the cooperative, a customer must invest a certain amount of money in the business.

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