One of the first steps of starting a small business is deciding which structure will both match your vision and needs. There are five primary structures to choose from, and each has its own benefits and drawbacks under business law. Here is a brief guide to the various formations, so you can determine which one is ideal for your situation. 

5 Types of Business Formations 

1. Sole Proprietorships 

Sole proprietorships are the easiest kind of business to form because they require no incorporation documents. A sole proprietorship is owned and operated by one person, and the business itself is not considered a separate legal entity, which means the owner is personally liable for any suits or creditor claims against the business. Additionally, all income and expenses are filed with the owner’s personal tax return. 

2. Partnerships

Partnerships are businesses founded by at least two people. To ensure everyone has the same expectations, it is essential to draft a partnership agreement that details the way in which the company will be run. However, the founders do not need to file any documents with the state to establish the partnership. Similar to a sole proprietorship, the profits and losses are reported on each partner’s personal tax return. Unlike a sole proprietorship, though, a partnership must also file a separate return. 

3. Limited Liability Companies

To establish a limited liability company (LLC) in Hawaii, you must file articles of organization with the Department of Commerce and Consumer Affairs Businesses Registration Division. You must also designate an agent who will accept legal papers on behalf of the LLC should it ever be named in a suit. Forming an LLC is a considerable amount of work, but as the name implies, this structure protects the owners from liability. A LLC can be taxed as a partnership or corporation. 

4. Corporations 

Corporations are the most complicated kind of business to form. In addition to articles of incorporation and a registered agent, they require incorporators, directors, a stock structure, corporate purpose, and incorporation bylaws. Each type of corporation has its own tax implications. A business law attorney can explain the various corporation structures if this is the route you wish to pursue. 

5. Nonprofit Organizations 

Although not a traditional formation, nonprofit organizations are a distinct business structure. After covering their expenses, including employee salaries, nonprofit organizations do not pass on excess revenue to the owners. Instead, these funds are used to further a specific mission. 

If you need legal counsel regarding your small business, turn to the seasoned team at the Law Offices of Reuben S. F. Wong in Honolulu. This firm has represented individuals, families, and businesses on Oahu for over 50 years. To learn more about their practice areas, which include real estate law, wealth preservation, alternative energy development, and estate planning, visit their website. To schedule a free business law consultation, call (808) 531-3526.