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Business Formation Law

State authorities regulate Business Formation Law in the US. Although there are many federal laws that affect businesses in the US, most state laws are very similar. Here are 3 types of businesses and the laws that affect them.

Sole Proprietorship – One person owns this form of business, therefore the business is in his/her name. Most often these businesses are small and include professionals, consultants, and other service businesses. Sole proprietorships under the law are not seen as separate entities and therefore there have no legal formalities for creation. The owner will have to report their income and expenses on his/her own income tax return. It is important to note that both the person’s assets and the business’s assets are subject to claims by the business’s creditors.

Partnerships

General Partnership- These forms of businesses are joint, which means that the responsibility, profits, and liabilities are shared by the partners.

Limited Partnerships – These are seen in businesses that need funding or those who are investing in real estate development. Limited partnerships require a written agreement. Each partner will invest funds and should receive a predetermined share of the profits. The maximum number of partners varies according to state law. A limited partner is “limited” in the potential loss, as he can only lose his/her entire investment.

Corporations – These are organizations created by the state and they act as an artificial person. This means that corporations can sue, be sued and can issue stock. Since corporations function as separate entities, they can only be liable for the debts and damages up to the corporation’s total assets.