Company law, or corporate law as it is often referred to, is the body of law that oversees the rights, relations, and conduct of people, companies, organizations, and businesses. It refers to the legal practice of law in reference to corporations. Company law monitors how all the participants such as shareholders, employees, creditors, directors, investors, consumers, and the community within the scope of a corporation interact with each other. But what are the different types of companies in company law?
In the United States, there are five common types of companies in company law. They are sole proprietorships, corporations, limited liability companies, general partnerships, and non-profit companies. It is important for a new entrepreneur who wants to start a business to know the various types of companies and their organizational structures so they can make an informed decision they are able to work with.
Suppose they are a current business owner looking to change the business structure. In that case, a thorough knowledge of what is beneficial as well as needed for the desired structure change is necessary as well. Let’s take a look in more detail at the different types of company law.
- Five Common Types of Companies in Company Law
- What Are Some Well-Known Companies That Represent the Five Types of Company Law?
- What Is Important to Know When Starting Any Type of Corporation?
- Related Articles
Five Common Types of Companies in Company Law
This type of company is best for people who will be the only ones running their business, such as freelance writers, independent caretakers, or dog walkers. This one person is responsible for everything that pertains to the business –– profits, loses, damages, taxes, etc. There are usually no employees to pay. Some of the benefits of owning a sole proprietorship are:
- It is easy to start up.
- It does not cost much money.
- It is easy to dissolve if that becomes necessary.
- It does not require a lot of formal business sense, mainly bookkeeping.
- The company’s liabilities are treated as the owner’s liabilities.
- If the owner dies, the company just ceases to exist.
A sole proprietorship is unlike a freelancer in that a sole proprietor registers a business name and can even contract other employees if needed. However, the business owner is the sole person responsible and liable for the business and damages should they occur.
A Corporation is different than a sole proprietorship in that the business is separate from the owner and is chartered by the state. In a corporation, the business enters contracts, pays taxes and can be sued. Individuals can become shareholders by purchasing stock in the company, and they will be partial owners.
There are two types of corporations, S corporations, and C corporations.
- S corporations pass all of their finances through to the shareholders. This includes income, losses, tax deductions, and credits. In this instance, S corporations are taxed like a partnership, but they get corporation perks. Because shareholders are responsible for income and loss, they pay specific corporate taxes that only pertain to passive income and gains outside what the shareholders keep. Thus, S corporations can avoid the double taxation that often comes with the other type of corporations –– C corporations.
- C corporations are similar to S corporations. C corporations are able to be a partnership, corporation, or LLC. They also get specific tax benefits in that the company’s profits are taxed independently of the profits of the owners. C corporations also must have a board of directors who make decisions for the company. They are separate from the shareholders, who are more the financial backers. The downside of C corporations is that they can be slammed with double taxation. When this happens, the company’s profits are taxed at the corporate level, and then the individuals are taxed on their income tax returns. The way C corporations can get around this double taxation is to spread the profits around to the employees as benefits. When they do this, it allows the corporation to get a lower-rate tax on their personal tax returns.
Limited Liability Company (LLC)
In a Limited Liability Company, the business owner’s personal liability is limited as well as the ability of numerous people, partners and organizations to participate in the business. The difference between an LLC and a corporation is that in a corporation, the company is owned by the shareholders, but in an LLC, several people can be owners regardless of how much they invested in the company.
There are some limits as to who can form an LLC, though. These limits can pertain to banks and insurance companies.
LLCs have distinct tax situations in comparison to a corporation or sole proprietorships. The IRS will treat an LLC as a corporation, a partnership, or even as part of the owner’s tax return, depending upon the elections made by the LLC and the number of members it has.
If you want to form an LLC, you will have to write up the articles of incorporation where the structure of the business is explained. However, having an LLC does not require a board of directors.
When two or more people want to go into business together seeking profit, they form a partnership. There are two types of partnerships people can form –– a general partnership and a limited partnership. In a general partnership, all of the profits, losses, legal obligations, and assets are shared. Each member of the partnership is responsible for any financial and legal damages, so their personal finances could be at risk.
In a limited partnership, there can be members to the partnership who only provide funding. They don’t get involved in the day-to-day running of the business. And in the event that the company doesn’t last, they aren’t liable.
Non-profit corporations share some similarities as corporations. They have a board of directors and usually have donors or other people backing them financially. They are generally formed to support a cause, one that is public and generally for members of the non-profit. The most significant difference, though, is that their business is not seeking to make a profit.
Non-profits do not pay any corporate or federal taxes and can receive financial support in a variety of ways, including grants. One of the most significant assets to having a non-profit is that all contributions to the organization are tax-deductible, which, aside from the specific cause, is another incentive for people to donate to the organization.
What Are Some Well-Known Companies That Represent the Five Types of Company Law?
Sole Proprietorship – These companies began as sole proprietorship companies
- Sears, Roebuck, and Company
- J.C. Penney
- J.P. Morgan Chase
- Dominos Pizza
- Exxon Mobile
Limited Liability Companies
- Steve Jobs and Steve Wozniak, Apple
- Mark Zuckerburg and the Winklevoss Brothers, Facebook
- William Procter and James Gamble, P&G
- Bill Hewlett and Dave Packard, HP
- Larry Page and Sergey Brin, Google
- American Heart Association
- American Red Cross
- United Way
- Humane Society of the United States
- Salvation Army
What Is Important to Know When Starting Any Type of Corporation?
First, you want to pick the proper business structure for your business. This will affect your liability, what taxes you will need to pay, and how you raise money. In general, most people start as a sole proprietorship or partnership because it is easy and requires minimal paperwork.
Find out what licenses and permits you may need to operate your business, like business licenses, fire permits, liquor licenses, and more. You just need to make sure you have covered all your bases required by the laws of your country, state, county, and city.
Next, make sure you are paying the proper taxes for the business structure of your choosing. You can always check with the IRS to find out the requirements for your business type so that you don’t end up having to pay any fines or fees down the road.
In some areas, you will be required to keep proper records of all your business transactions, so you want to set up a proper filing and bookkeeping system for all of your documents and transactions.
If your business is operating with many business owners, make sure you have a written founder’s agreement and that everybody understands what their rights and responsibilities are concerning the business you are forming. Depending on the type of business structure you choose, you may want to have a legal representative on board to ensure all documents are in order.
Make sure to get your Employer Identification Number (EIN). You will need to have this in order to open a corporate bank account and file your business taxes. These can be obtained for free from the IRS and are easy to apply for. The only time you do not need an EIN number is if you are a sole proprietor or single-member LLC with no employees.
If you have any patents, copyrights, or trademarks, you want to make sure these are protected. This is considered your intellectual property (IP), and they need to be filed as soon as possible as it can take years to complete. There are experienced IP attorneys who can help you through the complicated process.
If you have employees, you need to purchase workers’ compensation. Coverage should start the first day your employee starts working.
If you have investors, you need to make sure they are accredited. For an investor to be accredited, they need to have at least $1 million in the bank, at least $200,000 in annual income and understand and be willing to take the investment risk.
Starting a business is very complicated and is best done by hiring legal counsel. Knowing what type of business structure you want and getting established properly and legally for your business type will make things run a lot smoother down the road.
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Alexandra Christensen is a freelance writer and editor. When she is not working on an assignment, she can be found hanging around with other writers on Medium.com/@alexandra_creates where she writes mostly about raising foster and adopted kids and those with invisible disabilities.