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What is Business Organization Law?

Definition of Business Organization Law

Business organization law refers to the numerous ways a business may be legally formed under state laws. In addition to incorporating as a corporation, businesses may also be formed as partnerships, limited liability companies (LLCs), S Corporations, and other business forms. Since each business organization brings with it a specific set of tax, management, and liability benefits and drawbacks, choosing the right type of organization for your business depends on many factors. Attorneys with expertise in business organization law can help clients choose the best form that gives clients the benefits they desire.

A business's organization can also determine how a business grows. Corporations issue stock, which allows investors to join and leave by buying or selling stock shares. LLCs, on the other hand, divide up ownership by percentage. Some states do not allow partnerships to change at all; if one partner decides to leave, the partnership must be dissolved and a new partnership created if the remaining owner wishes to bring in a new partner.

With all of these tricky benefits and drawbacks, many individuals hire an lawyer well before officially organizing a business in order to prepare for these and other legal issues that could arise.

Terms to Know

  • Corporation - A legal entity formed to conduct business; can be either a close corporation, where only a few people own the corporation and its stock is not publicly traded, or can be a public corporation, whose stock is traded on the stock exchange
  • Partnership - An association of two or more persons or entities that conduct business as co-owners
  • Limited Liability Company (LLC) - A business entity made up of one or more owners who cannot be held personally liable for the faults of the company
  • S Corporation - A special type of corporation with a limited number of shareholders that provides certain tax benefits without stock options
  • Sole Proprietorship - A business owned and operated by a single person who is solely liable for all of the business's obligations
  • Piercing the Corporate Veil - A judicial act of imposing personal liability on the owners, shareholders, or officers of a corporation for the corporation's wrongful acts
  • Dissolution - Terminating a business; may be done voluntarily by the shareholders or owners of a business, or involuntarily by a court

For more legal definitions, visit the FindLaw Legal Dictionary.

Other Considerations When Hiring a Business Organization Lawyer

People generally form a business organization to take advantage of state and federal tax benefits, as well as to limit their own personal liability if the business defaults on debts or breaks the law. However, business organizations often require owners to file annual or quarterly reports with the state, as well as complete other formalities to remain a legal business.

A sole proprietorship - conducting business without forming a legal business entity - allows business owners to avoid the registration and reporting requirements, but it does not provide the same tax benefits or liability limits. When hiring a lawyer to help with business organization, you should find an attorney who will explore the benefits and drawbacks of all of these options.

Also, a business does not have to be organized in your home state. Since each state offers different tax or other benefits for each type of business organization, you could choose the state that will give you the benefits you want most. However, you likely will still have to register your business with your home state, if you intend to conduct business there. When hiring a lawyer, be sure to hire one who will help you organize your business in another state if that gives you the maximum benefit.

If you are considering forming a business, contact a business organization lawyer immediately to explore your legal options.

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