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A Simple Glossary of Legal Structures for Businesses

written by: SallyOdum•edited by: Jean Scheid•updated: 7/4/2011

When you decide to start a business, there are a variety of different forms or legal structures that you can choose and certain important laws you need to follow. The business structure you select will have important ramifications in everything from tax filings to legal rights.

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    Important Business Legal Definitions

    It is very helpful to have at least a broad general knowledge of the different types of business forms, the legal definition for copyright and trademark license DBA. You might opt for a sole proprietorship if you are the only owner, you want a very simple business structure, and you plan to be personally liable for all your business debts. Partnerships take two forms, and offer more personal liability protection than a sole proprietorship. Corporations are treated as if they are a separate entity from the owners and offer the most personal liability protection.

    Each state has different rules governing its business structures, although the following features are common. You may incorporate in any state, but three popular states with corporate-friendly laws are Delaware, Nevada and Vermont.

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    The Various Types of Legal Structures

    Sole Proprietorship – This is the simplest form of business structure. The sole proprietorship is where the owner and the worker are the same person. You have personal responsibility for the business and it’s debts as well as its assets and income.

    DBA – This stands for “Doing Business As,” for example: John Jennings DBA (Doing Business As) BetterBoy Cleaners. For more information, refer to this article on how to establish a DBA.

    Trademark License – A trademark is a word, symbol or a design (or any combination thereof) that identifies and distinguishes your company from all other companies. The term trademark can encompasses your company’s service marks, trade dress and name.

    CopyrightThe author of an original work has an exclusive right over an established period of time in relation to his original work. Under the copyright, the author will control rights to the work’s publication, distribution and adaptation. After the copyright expires, the work enters into the public domain. A copyright can apply to an “expressible form of an idea” or “information that is substantive and discrete and fixed in a medium” such as intellectual property, songs, poetry or novels.1

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    Partnerships – There are two types of partnerships, general and limited.

    • General Partnership – Two or more people agree to jointly own assets, losses and profits of a business. Partners can be held personally liable for the responsibilities, obligations and losses of the business.
    • Limited Partnerships – LLP – Personal responsibility of the partners is more limited than the sole proprietorship or the general partnership. However, the limits of liability vary from state to state in the United States.

    Corporations – A corporation is considered a separate legal entity from its officers. Personal liability is very limited. The owners (shareholders or stockholders) are usually not held liable for the losses of the business. The corporation must keep separate bookkeeping records from the owners. It must have separate bank accounts. The corporation files income tax returns and pays taxes on the profits – separate and distinct from the owners / officers. Be careful because the shareholders are taxed on dividends. You can actually pay double taxes in this situation because the corporation will be taxed once, then your dividends will be taxed on your individual return. However, there are so many tax breaks and government incentives for corporations, you can work out a plan with a tax adviser to avoid or mitigate tax any potential tax problems.

    There are several different types of corporations:

    • Sub chapter S Corporation – This structure offers the benefits that it does not pay taxes on the income generated by the business. Income and losses are reported by the individual shareholders on the personal tax returns. This avoids “double taxation” as mentioned above.
    • Non-Stock Corporation – Associations and non-profit organizations use this structure.
    • Limited Liability Corporation – Multiple people can jointly own an LLC. The members will have limited liability for damages, losses and debts of the corporation. There may be one managing member who is responsible for management. The profits and losses of the business will pass to the owners’ income tax return. The LLC will also file a return (Form 1065) and each member will report taxable profit on Form K-1. Profit from the business is not considered to be “earned income” to the “members” or owners of the LLC – that means it’s not subject to self-employment taxes.

    1. Wikipedia.org