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What Is the Difference Between an Informal & Formal Business Structure?

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The type of legal structure a business chooses will impact many areas of the company, including how it is taxed, the personal liability of owners, and the ability to raise capital. For these reasons, it is important for business owners to have a clear understanding of the different types of business structures before making a decision.

Formal vs. Informal Business Structures

A formal business structure means that the company has a legal existence separate from its owners. The most common formal business structures are corporations and limited liability companies (LLCs). These types of businesses are regulated by state and federal laws, which set forth certain rules and requirements that must be met in order to maintain their legal status.

In contrast, an informal business structure does not have a separate legal existence from its owners. The most common type of informal business is a sole proprietorship, which is owned and operated by one person. Businesses that are categorized as sole proprietorships are not subject to the same level of regulation as formal business structures, but they do have some limitations. For example, sole proprietorships can only raise capital through personal savings or loans from family and friends, and the owners of sole proprietorships are personally liable for all debts and obligations of the business.

While informal business structures may be simpler to form and operate, they often do not provide the same level of protection for the owners as formal business structures. For this reason, it is important to consult with an experienced attorney before choosing a business structure. An attorney can help identify the benefits and drawbacks of each type of business structure and advise on which type of structure would be best suited for your particular business.

What Are the Different Types of Business Structures?

There are four common types of business structures in the United States: sole proprietorships, partnerships, corporations, and limited liability companies (LLCs). Each type of business structure has its own advantages and disadvantages.

Sole proprietorships are the simplest and most common type of business structure. They are owned by one person and are not required to file any formal paperwork with the state. The owner has complete control over all aspects of the business and is personally responsible for all debts and liabilities.

Partnerships are similar to sole proprietorships, but they are owned by two or more people. Partnerships can be either general partnerships or limited partnerships. General partnerships give all partners equal control over the business, while limited partnerships allow some partners to have a greater say in decision-making.

Corporations are more complex than sole proprietorships and partnerships. A corporation is its own legal entity, separate from its owners. This means that the owners are not personally liable for the debts and liabilities of the business. Corporations can be either for-profit or nonprofit.

Limited liability companies (LLCs) are a type of business structure that combines features of both corporations and partnerships. LLCs offer their owners limited personal liability, like corporations, but they are taxed like partnerships.

Making the Right Choice for Your Business

The type of business structure you choose will have a big impact on your company. It's important to weigh the pros and cons of each type of organization before making a decision. Speaking with an experienced attorney is the best way to ensure that you choose the right legal structure for your business. Reno & Zahm LLP has 100 years of experience helping businesses make strategic decisions for their business. Our team has the knowledge, skills, and experience needed to help you choose the right business structure for your company.

Contact us today at (815) 987-4050 to schedule a consultation!

The blog published by Reno & Zahm LLP is available for informational purposes only and is not considered legal advice on any subject matter. By viewing blog posts, the reader understands there is no attorney-client relationship between the reader and the blog publisher. The blog should not be used as a substitute for legal advice from a licensed professional attorney, and readers are urged to consult legal counsel on any specific legal questions concerning a specific situation.