When investors are assessing the potential of a financial investment, they not only need to understand the financial fundamentals of the company or venture, but also need to understand the legal structure of a company. The legal structure of a company affects its operations, the rights of its shareholders and other stakeholders, and even its tax obligations.
The most common type of legal structure for a company is the limited liability company (LLC). This type of entity is designed to protect its owners from personal liability and gives them flexibility in how they manage their business. An LLC is formed by filing articles of organization with the state in which it is located. The LLC is then required to operate according to its articles of organization, which includes provisions for how it will be managed and how disputes will be handled.
Another type of legal structure for a company is the corporation. The main benefit of forming a corporation is that it provides a separate legal identity from its owners and limits their personal liability. In addition, corporations are legally allowed to issue equity, such as stocks and bonds, as a way to raise capital. Corporations are formed by filing articles of incorporation with the state in which they are located. The articles of incorporation provide details on how the corporation will be managed and what rights shareholders will have.
A third type of legal structure for a company is the partnership. Partnerships are similar to corporations in that they provide a separate legal identity and limit personal liability for its owners. However, partnerships are not allowed to issue equity and instead rely on debt financing and equity contributions from partners. Partnerships are formed by entering into a partnership agreement, which outlines how the partnership will be managed and what rights partners will have.
Finally, some companies choose to form as a limited liability partnership (LLP). Like an LLC, an LLP provides protection from personal liability for its owners but also allows for more flexibility in how it is managed. An LLP is formed by filing articles of organization with the state in which it is located and must also operate according to its articles of organization.
When assessing potential investments, investors need to understand the legal structure of a company in order to evaluate the risks associated with their investment. By understanding what legal entity each company has chosen and what rights they offer their owners or shareholders, investors can make more informed decisions about where to put their money.
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