Deciding How
to Structure
Your Business
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When entrepreneurs, whether they are farmers,
retailers, service providers, high-tech inventors,
or others, determine to start or reorganize a
business, they should investigate common
options for structuring a business and choose
one as the way to organize their enterprise.
In general, they should pick the simplest form
of organization possible, but one that meets
their needs.
Choosing a form of business organiza¬
tion will depend on the goals and objectives of
the owners. Many factors must be evaluated,
including tax consequences, costs of formation,
complexity, limitations on liability, needs of
outside investors, estate planning and transition
issues, and other goals of the owners.
In many situations the form of business
organization may be dictated by the investors
who are financing the business. Investors and
lenders generally require use of a form of own¬
ership that they believe will best protect their
investment or security. Tax considerations must
be taken into account but should not necessarily
override other aspects. Estate planning issues
and intra-family issues also will be important.
If passive investors are involved, choosing a
business form that limits their liability may be
very important. Startup costs, ongoing mainte¬
nance costs, and costs associated with taxes
are further considerations. Lastly, the willing¬
ness and ability of the owners to meet the for¬
mal requirements of whichever model is chosen
are critical factors. It is futile to adopt a form
of business organization if a court is going
to set it aside because the owners failed to
observe formalities.
Here is an overview of the most commonly
used business-organization models — sole pro¬
prietorship, partnership, limited liability com¬
pany, and corporation. Some other business
models, such as trusts and estates, are not de¬
scribed here. Statutory limitations on the time
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that an estate may remain open prevent the use
of an estate as a realistic choice for long-term
operation of a business. Trusts, except for living
trusts, usually function as passive owners in
the business models described here. Revocable
living trusts, when used to operate businesses
directly, usually do not operate much differ¬
ently than a sole proprietorship.
Sole Proprietorship
A sole proprietorship is the simplest form
of business organization: One person owns all
of the assets and is responsible for all of the
debts. The business income is reported on the
owner’s federal tax return. Form 1040, Sched¬
ule C, C-EZ, or F. Many farms and independent
businesses, such as restaurants, are operated as
sole proprietorships.
Partnership
A partnership is an association of two or
more persons established to conduct a busi¬
ness for profit. The relationship is consensual
and usually bound by a legal contract that
defines the partnership agreement. A partner¬
ship is treated as an entity for litigation and
bankruptcy proceedings and may hold title to
property. North Carolina has adopted the Uni¬
form Partnership Act (UPA). Under the UPA,
partners have equal management authority and
share equally in profits and losses. The partners
also have an equal obligation to contribute
time, energy, and skill to the partnership busi¬
ness without compensation. Each partner has
unlimited personal liability to the partnership’s
creditors, and all partners are liable for wrong¬
ful acts and breaches of trust by any partner.
The UPA provides these default provisions in
the absence of a partnership agreement to the
contrary. Most provisions of the UPA can be
