When setting up a business, it is essential you consider which legal structure will allow your company to reach its full potential.
Each has its own advantages and disadvantages, which is why every option should be thoroughly explored before a decision is made.
A business should be structured according to the needs of the owners.
(Anything you read on College Entrepreneur 101 should not be taken as legal advice: Please consult a lawyer)
Below I have listed 8 ways to structure your first business in college:
This is the most popular form of business structure and as the name suggests, it is one-person running the show.
You will still have to comply with local registration rules, apply for a business license or permit, and follow certain laws to make your business legitimate.
In this type of structure, you are personally responsible for paying income taxes and you are also liable for all business debts.
- You’re the boss
- You keep all the profits
- Start-up costs are low
- You have maximum privacy
- Setting up and running your business is easy
- It’s easy to change your legal structure later as circumstances change
- Your ability to raise capital will be limited
- All the responsibility for making day-to-day business decisions is yours
- Retaining high-caliber employees can be difficult
- You’re taxed as a single person
The outline of a general partnership was laid out in the Partnership Act in 1890, which explains it as “the relation which subsists between persons carrying on a business in common with a view of profit”.
A business that’s not established with the state that has more than one person is automatically a general partnership.
This structure remains the same and sees each member share equal rights and responsibilities, as well as joint liability for debts.
This can have significant implications, as a general partnership does not have the protection of a legal identity. Therefore the partners do not have limited liability, meaning any of their personal assets could be used to pay back the companies costs.
- Shared cost of start-up.
- Joint responsibilities and work.
- Similar business risks and expenses.
- The additional contacts and complementary skills of each partner can lead to greater financial results together than would be possible separately.
- Mutual support and motivation.
- Shared profits. Presumably, a partnership involves a breakdown of corporate profits.
- Shared liabilities. As a rule, shareholders of a partnership are jointly and severally liable for the entrepreneurial activities of the company.
Limited partnerships differ from general partnership because general partnerships give equal responsibility.
In a limited partnership, there can be many limited partners and only one general partnership.
- Liability for the business and the responsibility of the business owners is shared across the partners, reducing the burden for all
- This means there will be limited liability options for the limited partners
- Partnerships of this form are not subject to double taxation
- Limited partners will still have access to income flow and expenditures
- In businesses with these forms of partnerships, income is taxed to the partners and not to the partnership itself.
- A significant increase in documentation and paperwork
- The general partner (all limited partnerships have at least one personally liable partner) continues to be jointly liable for the debts of the company
- A limited partnership usually needs to hold regular meetings and submit specific documents to comply with applicable laws.
Limited liability partnership
Limited Liability Partnerships came into action in 2000 and can be seen as a halfway house between a general partnership and a limited company.
While there is more paperwork involved and an application must be submitted to Companies House, the business will obtain a legal status.
This can be incredibly beneficial, as every partner will have limited liability, protecting their assets should the business face any debts.
- The initial capital investment will likely be higher because more people are available to invest their money
- LLP removes a portion of each partner’s personal liability.
- Sometimes partners let their friendships with other partners get in the way of successfully getting the job done.
- It can be the end of the partnership if one of the partners leaves the business. This can be avoided, however, by making sure that a legal partnership agreement is drawn up when the LLP is formed.
This business structure is recognized as its own legal entity.
A corporation has its own rights, privileges, and liabilities that separate it from those who own or manage it.
- Owners are not fully responsible if they are faced with legal problems or debts.
- The possibility of selling shares, which increases the probability of acquiring financial capital.
- A well-established structure with clearly defined roles, responsibilities, and agendas.
- Employees have the opportunity to buy shares at a fixed price and receive stock benefits.
- The process is time-consuming, expensive, and a lot of paperwork.
- Tons of regulations that provide little flexibility.
A non-profit corporation is a company or organization established for purposes other than profit.
Like standard for-profit corporations, nonprofit organizations offer personal liability protection. Which means the assets of directors and officers won’t be used to pay off the non-profits debts and liabilities.
- You don’t pay federal, state or local taxes
- Qualify for special grants and government funding, even lower postage rates
- Promote donation by giving donors a tax deduction
- Protects owners and directors from liability by its status as a company
- They can only pay the managers reasonable salaries but can never divide profits equally.
- Can not pay the Board of directors
- On dissolution, must distribute assets to other non-profits
A joint venture is when two parties join forces together temporarily to take advantage of each other’s capabilities to do something productive and profit together.
It is a temporary set up that lasts a few weeks, or months. It will not require a permanent registration such as a partnership.
- Access to new markets and distribution networks
- Increased capacity
- Sharing of risks and costs (i.e. liability) with a partner
- Access to more resources, including technical personnel, technology, and finance
- You can join forces in research, and development
- The partners have different goals for the joint venture
- The partners do not provide enough leadership and support at the beginning