Business Law

The operation of a business can take place in many different formats. Perhaps the four most common structures for running a business are sole proprietorship, partnership, corporation, or limited liability company.

In a sole proprietorship, the individual is the business. The format is not complex, and the individual receives all of the profits. On the down side, the individual also incurs all of the risk, and in the absence of sufficient insurance or some other appropriate protection, is not protected from personal liability.

A partnership is a joint undertaking between two or more persons or entities for profit. The partners in a general partnership are personally liable for all of the obligations of the partnership. A limited partnership must have at least one general partner and one limited partner. Generally, while a general partner has unlimited liability, the liability of a limited partner is limited to his or her investment in the business. Of course, as with most generalizations, there are some exceptions--each situation is unique.

Unlike a sole proprietorship, where the owner is the business, or a partnership, where the business is owned by the partners, the owners of a corporation are called shareholders. The shareholders elect the board of directors, which in turn appoints officers to manage the day-to-day affairs of the business. The directors adopt by-laws, which act as a roadmap for the entity's operation. Much like a limited partner in a limited partnership, the liability of a corporate shareholder is limited to that shareholder's investment in the business. Nevertheless, under certain circumstances a creditor can "pierce the corporate veil" and thereby establish liability not only against the corporation, but against the shareholder as well.

A limited liability company (LLC) sometimes is described as a hybrid between a partnership and a corporation. An LLC has the flexibility to combine the tax benefits of a partnership with the protection from personal liability that a corporation provides to its shareholders. The owners of a limited liability company are called "members."

Liability, complexity, taxation benefits, and public perception are just some of the factors to be considered in deciding how to operate a business. When two or more people decide to engage in business together, no matter what format the business takes, the business owners should consider entering into a formal, written agreement - a partnership agreement for a partnership, a shareholders' agreement for a corporation, and an operating agreement for a limited liability company. The agreement should address various issues, such as who manages the business, how disputes will be resolved, whether an owner can transfer his or her interest in the business, and what happens upon the death of one of the owners. These are just some of the issues the prospective business owners should address and agree upon before engaging in business together.