Over the centuries, a variety of legal structures have evolved. This is to reflect the challenges impacting specific segments of society and offer them with solutions that will simplify their lives. The result is that a host of entities can be utilized to address specific issues impacting people and organizations. However, each one has specific benefits and drawbacks. To fully understand them requires examining the different types of legal structures in detail. Together, these elements will illustrate how they are achieving these larger objectives.
The various of Legal Structures, Advantages and Disadvantages
There are numerous legal structures which are utilized to address specific objectives of the individuals who are creating them. The most notable include: nonprofits, S, B, C corporations and a sole proprietorship. Each one of them has specific benefits and drawbacks. This means that everybody must weigh them to determine if they will meet their needs.
Nonprofits are tax exempt entities under Section 501(c)(3) of the IRS Code. It specifically states that they cannot be taxed. This is because the majority of their activities is for the benefit of communities and society. The result is that any kind of income, donations, expenses and assets are considered to be tax free. At the same time, they are eligible for public / private grants, there is a formal structure and limited liability. The biggest drawbacks are associated with the costs to establish these kinds of entities, filing procedures and greater amounts of public scrutiny. (“Legal Issues for Nonprofits,” 2012)
S corporations are formed as a separate legal entity. However, the profits are passed through to the owners. They will report this as ordinary income on their taxes. There a number of benefits it provides to include: the straightforward transfer of ownership, tax favored income status and asset protection. The biggest drawbacks are less flexibility in allocating losses, stock ownership restrictions, closer IRS monitoring and continuing expenses for formation / continuation.
B corporations are separate legally recognized companies. They file with the Secretary of State to incorporate. However, they have larger interests beyond increasing their profit margins for the shareholders. Instead, they are concerned about the social impacts of their activities on the community and include this a part of the business model. The advantages that it offers include: asset protection, the ability to be a for profit organization which solves social problems and closely align their interests with those of various stakeholders. The biggest drawbacks are higher costs for continuous reporting. It must indicate what efforts are made to ensure it is aligning with the public’s interests.
C corporations are a separate legal entity. This means that it can incur debts, negotiate contract and has limited liabilities. These benefits enable them to have greater amounts of flexibility in raising additional working capital to fuel expansion. The biggest drawbacks are the double taxation of profits, the bureaucracy / expenses of maintaining the minutes and the dividends are passed on to the shareholders. This is based upon the percentage of ownership they possess. (Lane, 2013)
A sole proprietorship is an unincorporated legal entity. This means that the business owner is personally responsible for all liabilities and debts. The primary advantages include: they are easy to establish, less formal requirement, can easily transfer assets, there is a hands on management structure and no corporate income taxes. The biggest drawbacks are: the owner is personally liable for all debts. This means that if the business goes under, they must satisfy these obligations.
Clearly, each one of these entities have a separate legal structure. Each one has unique benefits that address the specific needs of the individuals establishing them. However, there are also disadvantages which could negatively affect the organization. This is why it is imperative for everyone to weigh the pros and cons during the process of establishing these legal structures. In the future, this will help them to develop an organization which is responsive to their needs. This is the point, they achieve their larger objectives by utilizing the right organizational structure.