A business legal structure is a formation that the entity is in that makes it legitimate. The legal business entity types and registration process differs between jurisdictions. Governments decide on the local laws to regulate the legal structure of businesses. This article will identify the typical business legal entity types.
What is a legal business? A legal business is registered with the government. It receives permission from that government to operate as an entity. Local government laws and rules control a legal business structure.
How to make a business legal? You can get legal representation to assist you with your business formation process. However, to make a business legal register it with government authorities. But, first, you must decide how you will legally structure your business. A business legal structure is a form a business is registered with at local government authorities. Here are the general forms of legal business ownership:
- Sole Proprietorship or Sole Trader
- General Partnership
This legal formation and registration allow you to legally run your enterprise. The legal setup keeps the business in harmony with government laws and requirements.
A business’s legal requirements will differ from country to country. But in most jurisdictions, the legal form and structures available to regularize a business are the same.
Business Legal Formation
An entrepreneurship road involves registering a legal entity. As mentioned above, there are options available for you to legalize a business. Sole Proprietorship, partnership, and corporation are the most common business legal structures. While cooperative institutions are less common but relevant and abundant.
“Seek legal advice about any of the available legal structures.”
01. Sole Proprietorship or Sole Trader Registration
A business legal entity can be in the form of a sole proprietorship.
A sole proprietorship is a legal entity where one person owns the business.
In a sole proprietorship (sole traders), one person owns the business. That individual is a sole-trader or in modern language a solo-entrepreneur (solopreneur).
A sole proprietorship is the most basic form of business ownership. It is available for small business entrepreneurs.
The founder is the only owner. A sole proprietor will have full responsibility for all management and administration obligations. The owner will be in full control of all elements relating to the startup day to day activities. Sole proprietors are responsible for all business decisions. The sole proprietor takes care of transactions and finances. Such as operation, cost, debts, loans, profits, losses, etc.
Some sole proprietors use a “trading as” name, instead of their actual government name. A trade name allows a sole proprietorship to have a business legal personality. That personality is separate from the sole trader’s distinctive identity. It is a made-up name that says the sole proprietor is doing business as that trade name. The sole trader can open accounts under that doing business as name. Besides, carrying out business transactions and entering into agreements using that trade name.
Consider the sole proprietorship advantages and disadvantages before becoming a sole trader.
Sole Proprietorship Advantages
Some advantages of being a sole proprietor are:
- The business legal registration will be easy and inexpensive. Jurisdictions require a few legal documentation and forms to register a sole proprietorship.
- The startup capital needed to commence is usually low. Government fees to register a sole proprietorship are nominal. Besides this, other financial startup responsibilities are low. Hence, many solopreneurs bootstraps their sole-proprietorship startup.
- The owner handles all the business legal compliance matters. However, the government regulatory burden is generally light. This is different from other legally formed entities. As governments control them and restrict their freedom.
- The sole proprietor makes and controls all business management decisions. It is within the sole trader’s authority only to decide the direction the business is going. They do not need to consult anyone else for final decisions.
- A sole proprietorship owner receives all the business income and profits. This means that all the revenue the business generates belongs to the sole trader. The more lucrative the entity is the richer the sole proprietor.
Sole Proprietorship Disadvantages
There are disadvantages to being a sole proprietor. Such as:
- The sole proprietor assumes full liability. This means that only the owner is liable for any business debts. A creditor can make claims against the sole proprietor. Along with the owner’s personal assets to pay off debts. As there is no legal distinction between private assets and business assets.
- With one person at the helm of the entity, what will happen in cases of sickness and emergencies? If the entrepreneur experiences unexpected circumstances, there is a lack of continuity. Day-to-day activities are difficult to continue if the sole proprietor is unavailable. It may be difficult to take holidays.
- In a sole proprietorship sometimes, it is difficult to raise capital investments. Hence, it may not interest or benefit financial capitalists to fund the business.
Sole traders may have to invest their savings to start and run the business. At times, persons mortgage their home, so they can start a sole proprietorship entity.
An entrepreneur may set up a new business that has little risk of liability as a sole proprietorship. Bootstrapped businesses for instance have little to no finances. Thus, the only available option may be to register as sole traders. Some sole traders are one-person operations at the start of the business. However, after the business generates profits, sole traders may change the entity’s legal structure.
02. Partnership: Business Legal Model
Two characteristics of a partnership are that it includes at least two owners and a trading name. General partnership business has a legal personality, under the trade name.
In a partnership, two or more parties come together and decide to start a business.
The business legal formation can be the idea of two or more partners. Partners in a partnership form an arrangement. They agree to work together to advance their mutual ideas and benefits. Such, persons create a general partnership to further their business initiative. A general partnership aims to run an enterprise and generate revenue.
Parties of a partnership put together their abilities and financial resources. All partners share the profits of the business.
A partnership can start smoothly but result in conflicts during the course operations. But, you want partnerships run without problems throughout the partnership. So, draw up legal agreements between partners.
Hire a qualified business legal counsel to draft the partnership agreements. After which, all parties of the partnership must execute the legal agreement. The said legal document is vital as it outlines the terms of the partnership. When settling disputes, it is a great resource to refer to.
Before embarking on joining forces with business partners, consider the general partnership’s advantages and disadvantages.
General Partnerships Advantages
In partnerships the advantages are:
- Like sole proprietorship, it is easy and inexpensive to register a partnership. Also, the length of time it would take to register a partnership is short.
- The partners contribute to the startup cost or capital. In a sole proprietorship, the burden is on the sole trader to raise capital. However, in a partnership, all partners must contribute a share of the start-up cost of the entity.
- They have a share in the management, profits, and assets. It’s a partnership agreement remember. So, all parties registered as owners will make decisions for the entity. When the business generates profit each partner will receive a share.
General Partnerships Disadvantages
The disadvantages of forming a partnership are:
- There is no legal difference between partners and the business. This means that partners are liable for the actions of the entity.
- Bad business decisions can affect the personal assets of partners. Personal assets from all partners can be called in to pay off debts. Hence, choose your business partners wisely.
- It can be hard to find the right and trustworthy partner. If a partner makes a bad decision, it affects the other partners too. E.g. Contractual arrangements between itself and third parties. What if a partner does not honor those agreements? Unfortunately, other partners are also held responsible.
- Conflicts may arise between partners during the business administration. The ideas may change and at times misunderstandings may occur. When partners are no longer on the same page conflicts that affect the business will occur.
Remember: When forming partnerships have business legal contracts. These contracts must govern the agreement between business partners.
03. Corporation: Legal Business Ownership
The business legal form can be a corporation or a company.
In a corporation, a group of persons or entities come together to form a business with the same core goal.
A corporation is the most common form of business ownership. There are large and popular business cooperation examples. Such as General Motors, Google, Microsoft, and Apple. But, there are also small business corporations.
In a corporation, a group of individuals or entities form a company. They receive approval and authorization to execute their business as a single entity. This single entity has a business legal personality and a trading name.
Under a business name, a corporation has legal rights, responsibilities, and identity. It can enter into contracts, be liable, and hold others liable. This legal personality removes liability from the owners of the corporation.
Owners of a corporation are not personally liable for the acts of the corporation. You can organize a corporation to make a profit or as a non-profit organization.
You must know the corporation’s advantages and disadvantages before forming one.
The benefits of structuring a small business as a corporation are:
- An incorporated business is a legal entity that is separate from its owners. Corporations have limited liability. Thus, individual owners are not liable for the debts of the corporation. As shareholders are not liable for these obligations, corporations protect the owner’s private assets.
- There is continuity in business activities all the time. If an owner is unavailable, the business will still exist and function. Business operations will go on. The corporation does not have to suffer due to events such as emergencies or sickness.
- In a corporate business entity, funding resources are many. It is easier to raise capital than it might be with other legal business structures. When trying to raise funds corporate registered businesses are more attractive.
The disadvantages of the corporate business structure are:
- The setup of a corporation is costly. It is more expensive to set up a corporation than other business forms. The registration process and activities can also be time-consuming.
- Stakeholders monitor the business’s legal affairs heavily. Thus, the decision-making process has little freedom. There are many individuals and processes involved before making a corporate decision.
- The government regulates corporations. Corporations require extensive corporate records which include documentation filed annually with the government.
- In a corporation type of business, conflicts may arise between the owners. Lack of conflict resolutions can harm the business procedures and activities.
Business practices that are legal but unethical can give your brand a bad reputation. It is always wise to seek legal advice before incorporating a business.
04. Cooperative: Business Legal Environment
A legal business entity may also be a cooperative.
A cooperative is an entity that comprises two or more persons or other entities with shared objectives.
Co-operatives unite parties to act in the best interest of all members of the entity. A co-operative may have a common goal such as economic, social, and cultural. A cooperative is also called a coop or co-op.
Co-operative associations are jointly owned by parties. You call a person/entity that is part of a cooperative a member. Each member of a cooperative has a say. All parties of a co-op share a common interest or goal in how the business operates. The cooperative has a democratic operation system. All eligible members have input into the decisions of the co-op.
Here are some common identifiers of a cooperative organization. It has open membership. This means that members can voluntarily join the cooperative. It is democratic and controlled by its members. Each member has a vote when electing directors and making decisions.
Cooperative business tends to have an interest in people at the community level. A cooperative society may represent banks or education platforms. Some other co-ops are social enterprises, farmer associations, and worker associations.
Here are the advantages and disadvantages of cooperative business legal structures.
Advantages of Cooperative
Like all businesses, structures of cooperatives have their benefits.
- Its cooperative nature allows for the business to operate at lower costs. This means that persons come together to manage and maintain the organization. Thus, cooperative benefits by its members having a share in the cost it takes to run the co-op. E.g. the splitting of operation expenses. Co-ops may include a registration fee and membership fee. All this income goes into the financial operation of the establishment.
- Democracy helps co-operatives to run with a free and fair objective. Each member has a say and can dictate the direction the co-op goes by their one vote. This democratic structure assists in the decision-making of the enterprise. It also helps a cooperative society to reduce differences and conflicts.
- Some other cooperative benefits are that there is no limit to the number of parties. The number of members within the entity is unlimited. Any act done under the cooperative has limited liability on the members. A cooperative business ownership structure promotes cooperation between members. They have a shared responsibility and contribution.
Disadvantages of Cooperative Society
Here are some drawbacks of registering a cooperative society.
- Each member will assist the cooperative to run smoothly. But if members shirk their responsibilities the entity would not function at full capacity. When all members do not participate other members could become discouraged. Lack of participation retards business growth and leaves duties and business operations undid.
- In a cooperative business legal environment funding avenues can be challenging. Investors may lack the motivation to contribute capital and finance cooperatives. Large investors instead decide to invest in other legal business models.
- Each member has a say to skew the business direction which may be unworkable at times. Votes for or against a matter may be bias and work against some members. Decisions may become politicized. Thus, at times fail to benefit all members of the cooperative.
A cooperative business ownership model is productive. Coops usually have social characteristics and aim to accomplish social goals. Members of a cooperative often receive a share of a coop legal entity earnings as dividends on sales.
In closing, business registration forms include sole proprietorship, partnership, corporation, or cooperative. Those are the four (4) types of business legal structures. Sole proprietorships are the cheapest business legal structure. While a corporation is most expensive to start. Partnership business structures must have a legal agreement executed by all partners of the entity. Cooperative business entities are democratic organizations and can have an unlimited amount of members.
Before making any firm decision on how you will register your business be wise. Do further research. It will help you to know what business legal structure works best in your circumstance. Due diligence will help you to determine what applies to your jurisdiction. A business legal consultant can give you the best advice on how to legalize your entity. Followed by a legal attorney can help you to apply the correct legal requirements to your entity.
Business Legal Structure (FAQ)
Here are some commonly asked questions concerning business structures and the answers to those questions.
How to legalize business?
Business owners are responsible for registering their business. The registration process legalizes the business with the government in their country. You can hire a business legal attorney to help you register your business. Once the business fulfills its legal obligations to governments it can operate. It can freely carry out business transactions in its registration jurisdiction.
When to make a business legal?
This is up to the business owner and the conscience of an individual. But you must always aim to operate your business in harmony with the local laws in your jurisdiction. If an entrepreneur is running a business using their legal personal name, such entities do not need registration. Contact your company registration bodies or a business legal attorney to confirm this.
How to find a business legal name?
Shopify business name idea generator and Biznamewiz can help you come up with a business name idea. Squad Help is another source to help you brainstorm a business name idea. Legal Zoom is an online platform that can do business name searches and assist with business registration. You can use them to see if a business name idea you have is available for registration. Alternatively, you can visit your local business registration department in your jurisdiction. There you can do a business name search.
What is a dba business name?
First, DBA means “doing business as”. Many still ask: “is a DBA a legal business name?” You can call a DBA a business legal description. Here is the difference between a business legal name and a trading name. Your business may have one name and be registered as a corporation. However, your corporation can operate under different names. Hence, “doing business as” comes into play. A trade name (DBA) is a legal business name your business can operate under besides its literal name.
What is the business legal name for a sole proprietorship?
A sole trader’s business name can be their actual government name. However, it can also be a fictitious made-up name i.e. trade name or a doing business as “name”.
How much are legal fees for a small business?
The legal fees to register a business depend on the type of business legal structure. Whether it will be a sole trader business, partnership, corporation, or cooperative. It also depends on the jurisdiction in which the business registration process will occur. Every country and jurisdiction’s business registration fees will differ. Small business legal services can assist you with figuring out the fees your business registration will incur.
What are business legal requirements?
The legal business requirements of an entity will differ from one country to another. All businesses must work in harmony with the legal constraints of their jurisdictions. Business taxes and annual government fees for example are legal requirements for businesses in most countries. Again a business consultant or legal attorney is best suited to provide this information.