Understanding the Various Legal Stauses of a Business
To best understand the legal status of a business, it’s important to know that the government looks at a business like it is a legal entity. So let’s look at the dictionary definition of an entity. Merriam-Webster defines an entity as “something that has separate and distinct existence and objective”.
We can best describe this with quick example: Let’s say Mary Jackson is a business owner and she has business called Acme Sporting Goods. Mary of course is a person who just happens to own a business. She has a distinct existence from other people and in the eyes of the law, she is her own person.
Similarly in the eyes of the law, Acme Sporting Goods has a distinct existence and will be treated as such, again in the eyes of the law. The big question that arises from this example is how does anything that happens to the business impact the owner or even the employees?
Limit Liability by forming a Corporation
By far the most common business structure in the United States is a Sole Proprietorship. According to Entrepreneur.com “The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts”.
In our example above, Mary owns a sporting goods store, it’s a small local store and she is the only owner. She has not incorporated and she is 100% responsible for any debts incurred by the business. Business structures that allow business debt to “pass through” to the ownership are called exactly that “pass through business structures”.
Over 70% of the business in the United States are sole proprietorships. And although this large of a percentage may not seem sound financially, it may be a left over symptom of past difficulty in forming a corporation. And we will discuss some of the newer option available to business owners later in this article.
What about a Partnership?
Just like a sole proprietorship, partnerships are not legal entities. In fact a partnership is exactly like a sole proprietorship except there are two or more people involved and the business is divided amoung the multiple owners by some agreed upon percentage.