Common Business Structure Options

A business is defined simply as a legally registered company or business undertaking engaged in business. Most businesses are either for-profit enterprises or they may also be non-for profit organizations which function to further a social cause or an educational charity. There are many types of businesses ranging from small family-owned operations right up to international corporations employing hundreds, if not thousands, of people. In fact, the term ‘Business’ is much more than just the name on the business cards.

Business, like most other professions, involves the exchange of goods and services for monetary gains. In business, profits are earned through the process of producing and selling goods and services. Profits can also be obtained through the sale of assets, stock, investments, and futures. While profits are most commonly seen as the result of sales, businesses may also receive a portion of the value of the raw materials they use to produce their goods and services, or even a share of the profits created by a partner who sells shares in the business. For example, if a company creates a new product, produces the product in a plant, and then ships the product to retailers, they will receive a percentage of the profits from the transaction.

Another way for businesses to earn profits is through the creation of partnerships or joint ventures. Partnerships in a venture include any business arrangement wherein one business lends money to another in return for a royalty. Partnerships can range from common office space and supplies to ownership interest or shares in the partnership.

The formation of a partnership requires the formation of two different companies. The first company formed in the partnership is commonly known as the ‘ersedent company.’ The second company is usually referred to as the ‘successor company’ and continues in the same manner as the former company. Once both companies have been formed, both companies are treated as a single corporation for tax purposes. However, in some cases, the original company continues to exist as a C corporation, and is taxed as such.

Another popular way for many businesses to benefit from a partnership is by creating an LLC or Limited Liability Company. An LLC is a legal entity that limits the personal liability while protecting profits. LLCs are often helpful when an entrepreneur is concerned about being sued personally because of actions taken on the business’s behalf by another person or company. Limited Liability Companies are most commonly known as ‘pass-through’ corporations. Because LLCs are not taxed as corporations, they do not have to pay corporate taxes on their own profits.

Many small businesses may choose to form a corporation in order to benefit from a limited liability company. Others may prefer the privacy of being an LLC, which allows them to avoid publicity and personal liability as far as their business dealings are concerned. Business owners should consult with their tax professional to determine the pros and cons of incorporating their business as a partnership, a C corporation, or an LLC.