Legal Considerations for Choosing a Business Entity

Before opening a business, owners have several issues to consider. Potential business owners must first decide what business entity will be the best for their business. Several choices include a sole proprietorship, a partnership, limited partnership, limited liability company and corporation. Factors to be considered include liability issues, control, taxation, risk and employment laws.

If a potential business owner has investors interested in providing capital to help with start-up costs, perhaps for a percentage of ownership in the business, a limited partnership may be the best choice of the type entity for the business. A limited partnership is a "partnership that has two types of partners; general partners and limited partners, also known as a special partnership." (Cheeseman 2010). A limited partner is a person who will not be taking part in the daily operations of the business but is providing capital for the operations and will also share in the profits. Becoming a limited partner would gives the advantage of making a profit from the business without being responsible for the legal liabilities and debts of the business.

According to The Revised Uniform Limited Partnership Act (RULPA), "The creation of a limited partnership is formal and requires public disclosure. The entity must comply with the statutory requirements of the RULPA or other state statutes. Under the RULPA, two or more persons must execute and sign a certificate of limited partnership [RULPA Sections 201, 206]." (Cheeseman 2010). A business owner has to be prepared to make public disclosures about their business including disclosing financial information, the name and address of an agent who would receive the service of legal processes and the nature of their business. They must file a certificate of limited partnership with the secretary of state in the state where their business is established. The owner must also be prepared to be both legally and financially responsible for any legl liabilities or debts of their business.

Even is a person is wealthy, he may want to consider additional investors for his business venture when taking legal liabilities into consideration. If he were to open a sole proprietorship, he would be assuming all legal and financial responsibilities for his organization. "A sole proprietor is legally responsible for the business's contracts and the torts he or she or any of his or her employees commit in the course of employment." (Cheeseman 2010). Even though the owner would have sole responsibility for legal liabilities, he would also have rights to make all decisions and receive all benefits from the profits of his business.

The potential business owner will have to weigh the facts and decide if he thinks receiving all the profits is worth the risk of all legal suites that could be brought against him. One consideration is product liability. "If a product defect causes injury or death to purchasers, lessees, users, or bystanders, the injured party or the heirs of a deceased person may bring legal actions and recover damages under certain tort doctrines." (Cheeseman 2010). If a business uses materials that have the potential to be misused and cause harm to customers, he may be sued if an injury occurs. Taking this into consideration, a sole proprietorship may not be the best choice of a business entity. Liability suits can potentially cost a company millions of dollars. In forming a limited liability company or a corporation, the owner would have to share in his profits but he would not run the risk of financial ruin from sole responsibility from legal liabilities.

Business owners must take into consideration the application of existing liability, taxation and employment laws before making decisions about what type of entity they would chose for their business. The risks have to be weighed and appropriate decisions made. A business has to take steps to insure they are legally covered against any liability claims that may arise. Knowing the laws about starting a business is an essential part of making wise business decisions.

Sources:

Cheeseman, H. R. (2010). The Legal Environment of Business and Online Commerce: Business Ethics, E-Commerce, Regulatory, and International Issues, Six Edition.