Overview of Legal and Tax Considerations in Business Structures

In this article, we will explain the importance of the company’s goal in deciding its commercial structure, and we will learn about many commercial structures, and how to differentiate between the goals and structures for profitable and non-profit activities.

Before starting with the content of this article, we would like to point out that everything that will be mentioned here in this article is derived from US laws, so please refer to the laws of the desired country in which you reside or want to establish a company for more details.

The business structure creates the legal, tax, and operational environment in which the business will operate. To choose a business structure, entrepreneurs must have a clear idea of ​​the type of business they are seeking to establish, the purpose behind it, its location, and how it will operate.

For example, a non-profit commercial activity is treated differently from a commercial activity whose owners seek to make a profit to be distributed among them. Therefore, the first step in the entrepreneurial project is defining the type and purpose of the business activity. (Fig. 2.13)

Figure 2.13: There are several basic business structures: sole proprietorships, partnerships, corporations, and hybrids. In partnerships there are also types, it may be structured as a general partnership, a limited partnership, or a limited liability partnership. In hybrid types, it is often formed as a limited liability company, or a joint venture.

The symbols C (the Conventional abbreviation for a traditional company “T”) and the S (the abbreviation for Small, which is a small company “y”) that accompany the names of some companies indicate the tax item under which they operate. Whereas, companies get the symbol B (B) when their structure and activity fit some criteria that entitle them to serve societal purposes. Copyright: Designed by Rice University, OpenStax, under license CC BY 4.0

One of the most important first decisions that an entrepreneur must make from a legal point of view is the legal organization of his company, the so-called business structure, or the selection of the entity. The choices are varied and varied, with many primary entities, each of which has many copies.

Many commercial projects – regardless of their humble beginnings – have the opportunity to develop into huge commercial projects; This is what makes the first decisions so important. The founders should think deeply about all the steps of business development, and continue that until after the establishment, to consider the possible paths of business, because how the entrepreneur organizes his business, and the work structure that he chooses has a great impact on him and his activity alike.

Business structure options are divided into traditional options, such as: corporations, partnerships, and sole proprietorships; Others are mixed, such as: LLCs, LLPs, and JVs. Each structure carries different ownership risks, different preparation requirements, and different obligations, such as taxes and government documents. Entrepreneurs must consider these factors when choosing a structure, and take into account the expected business growth, recognizing that the structure may and must change as the project grows. more.

For example, if you want to share power, responsibilities, and obligations with other people, your best option is probably a partnership, where other people contribute money and help run the business; If you prefer to run the business on your own, your best option may be a one-member LLC, assuming you can borrow money if necessary; Conversely, if you believe that your idea is so popular that you are able to grow quickly, and you want the ability to raise capital by selling interest in your business through equity or debt, then the company will be your best option. In any case, you should obtain legal and tax advice about the structure you intend to choose.

Create a business purpose

A clear understanding of the business purpose helps guide the entrepreneur towards the most appropriate business structure. The business purpose is the reason the entrepreneur forms the company and determines who benefits from it. Whether it is the owner of the project, or customers, or any other entity. The starting point in determining the appropriate organizational structure for the project comes after formulating the entrepreneur’s expectations, how the company will operate, with a careful analysis of how it will generate cash flows, generate profits, and to whom the company will owe its primary obligations. The written business plan helps the entrepreneur to develop the best legal structure in which his project is active, because the legal structure of the business must be related to the nature of the business.

Once the entrepreneur has determined the nature and purpose of his activity, he can start looking at the business structures, and the first thing he takes into account is whether the establishment of the entity aims to achieve a profit for the owners and shareholders, or the establishment of a non-profit entity; As for the second factor, it is the state of incorporation, as the protection laws differ according to the different states of incorporation. Other things to consider are how easy the structure is to attract new investors, support it to shift profits out of the business, and simplify it to sell the entity; Taxes are also a very important aspect of business success. The structure chosen affects how taxes are calculated in the business.

For-profit companies versus non-profit companies

Owners establish businesses for one of two purposes, either to make a profit, or to advance a social cause without making a profit. In either case, there are multiple options as to how the business is organized, as each structure carries its own tax obligations, which are determined by the owners’ financial requirements, and how they distribute the profits.

Characteristics of a profit-oriented business

A for-profit business is designed specifically to generate profits shared by the owners, and there are many structures used in for-profit business entities, such as: corporations, LLCs, partnerships, and sole proprietorships. But usually many for-profit business owners seek some form of limited liability and thus form a corporation, or LLC.

For-profit corporations are business entities that generally generate revenue, through sales of products or services; While nonprofit organizations are formed for social purposes, they can provide assets or income to individuals on the basis of compensation only for their services. For-profit companies may be either privately owned (such as a limited liability company) or publicly owned and traded (such as a corporation). Publicly owned and traded companies sell shares or interests, and must adhere to special rules to protect shareholders; Whereas privately owned companies may be less regulated. Regulations may vary by location and type of incorporation.

Characteristics of non-profit organizations

A non-for-profit organization, NFPO, is usually dedicated to serving the public interest, promoting a particular social cause, or advocating a common interest, as it must follow certain regulations regarding eligibility, government pressure, and exempt contributions. taxes. Financially speaking, the non-profit organization uses its surplus revenue to achieve its end goal, rather than distributing its income to the shareholders, partners, or members of the organization. Common examples of nonprofits include:

Educational institutions, such as: schools, colleges, and universities. public charities. religious organizations. Institutions, such as trade organizations. Advocacy groups.

Non-governmental organizations, civil society organizations, foundations that provide funding for various activities, and private voluntary organizations are all considered non-profit organizations. These types of organizations are created under local law, are usually in the public interest, and are usually tax-exempt, meaning they do not pay income tax on money they receive for their organization.

To operate as a not-for-profit corporation, most states in the USA, for example, require an entrepreneur to create a corporation with a specific purpose to act in the public interest. This type of company has no owners, but has managers charged with running the organization for the common good. Depending on the regulations, some states require at least one director, while others may require three or more directors, which is important for an entrepreneur, because a nonprofit will need the approval of all directors, not just one person to create it. Careful scrutiny of board members is the best policy for any entrepreneur because managers have a duty to the company.

Because laws differ between states, a not-for-profit corporation that is formed for the common good in one state needs permission from another state to operate in it. The entrepreneur must ensure that his business respects all the laws, rules, and regulations of each state in which he operates.

Another issue to consider is the creation of a non-profit business organization with a specific purpose. One example of a special purpose organization is the alumni organization, usually incorporated as a nonprofit organization under the 501(c)(3) code. Which involves raising funds for a college or university for a specific cause, such as scholarships for students.

An enhanced club may be set up to receive donations for a single purpose, and these organizations may need additional approvals before setting up or beginning operations, depending on local legal requirements. This is the reason why an entrepreneur needs to fully understand the purpose of the business he has started, and the legal operating environment before choosing a business structure.

It is true that nonprofit organizations play an important role, but most entrepreneurs are for-profit businesses. So the remainder of this chapter will focus primarily on for-profit business entities.

.addtional__paragraph { border: 3px solid #f5f5f5; margin: 20px 0 14px; position: relative; display: block; padding: 25px 30px; }

Entrepreneur in the field

Determine the purpose of your activity: for-profit, non-profit, or a combination of the two.

The approach used by Gravity Payments entrepreneur Dan Price.

Figure 3.13: Gravity Payments leads the way in exploring how traditional corporate and employee paychecks work from earnings, living wages, and associated ethical considerations. Copyright: Photo modified by Gravity Payments.

For-profit companies sometimes behave in a way that seems to some akin to a non-profit philosophy. Therefore, most emerging companies should specify the purpose of their commercial activity, so do they seek to enrich their owners? Or to spread the benefits of success to include employees? The history of Gravity Payments illustrates this point.

In 2011, an employee who earns $35,000 a year told his boss, Dan Price of Gravity Payments (a credit card payment company), that his income was not enough to live a decent life in the expensive city of Seattle. Dan was surprised by this fact, as he had always prided himself on his fair treatment of his employees. Accordingly, he decided to increase his annual wages by 20% for the next three years, yet profits were not affected and continued to exceed wages, so Dan announced his company’s work on setting a minimum wage of $70,000. He cut his salary from $1 million to $70,000 to prove he’s serious and help fund a company-wide salary increase. The following week, 5,000 people applied for jobs at Gravity, Inc. Including an executive at Yahoo, where she chose the lowest pay to work for a company where she considered work fun and valuable.

Price realized that low base wages were contrary to his values ​​and what was a large part of his business purpose, and although his subsequent wage hikes reduced profits, Graffiti’s revenue continued to grow, along with his client base and workforce. Price believes that managers should put purpose, impact, and service in the same place they put profits.

Do you think an entrepreneur can run a successful for-profit business, while paying his workers far more than his competitors?

Adapted translation of the chapter Business Structure Options: Legal, Tax, and Risk Issues from the book Entrepreneurship.

Read also

Previous article: Operations management in a business operational plan Forms of business ownership: sole proprietorship and partnership Understanding international economic groupings and presenting the most prominent international agreements

اترك تعليقًا

لن يتم نشر عنوان بريدك الإلكتروني. الحقول الإلزامية مشار إليها بـ *