An entity’s legal nature reflects its organizational form. Selecting the organizational form is one of the most important decisions business owners make. This choice affects the costs of raising capital, operating the business (including taxation issues), and, possibly, litigating. The available organizational form alternatives have increased remarkably in recent years. The most popular form for large, publicly traded businesses is the corporation. However, smaller businesses or cooperative ventures between large businesses also use general partnerships, limited partnerships, limited liability partnerships (LLPs), and limited liability companies (LLCs). These latter two forms have recently emerged due to new federal, state, and international legislation. Both the LLP and LLC provide more protection for a partner’s personal assets than a general partnership in the event of litigation that leads to firm liquidation.
Accordingly, LLPs and LLCs may offer better control for legal costs than general partnerships. Organizational form also helps determine who has the statutory authority to make decisions for the firm. In a general partnership, all partners are allowed to make business decisions as a mere incidence of ownership. Alternatively, in a corporation, individual shareholders must act through a board of directors who, in turn, typically rely on professional managers. This ability to “centralize” authority is regarded as one of the primary advantages of the corporate organizational form and, to some extent, is available in limited partnerships, LLPs, and LLCs. Once the organizational form is selected, top managers are responsible for creating a structure that is best suited to achieving the firm’s goals and objectives.