The material presented on site is of an informational nature only; it is not intended to provide legal counsel, nor substitute for the services and advice of competent, experienced, licensed legal professionals. It is strongly recommended that you consult with a qualified attorney or licensed financial professional prior to setting up any kind business entity, or if you have questions regarding your compliance with any tax, licensing, advertising or marketing regulations.


Basic Business Structures


People and groups of people have been doing business with each other since before the dawn of recorded time. The purpose then – as now – was to obtain something one did not have by exchanging it for something one did have.

It seemed like a good idea, but as society became more complex and transactions became more numerous and complicated, it became necessary to create specific rules governing these transactions in order to protect both parties. Often in history, these rules favored the seller, although the enactment of consumer protection laws over the past century also hold sellers and manufacturers liable.

Business structures such as LLCs, S-Corporations and others are designed to shield one’s personal assets should one incur such liability. Under the terms of a corporate charter, an injured party can under normal circumstances sue only the company, not the person who operates it. Furthermore, it protects one’s personal credit and assets from business debts, which are considered separate and apart from those of the business owner(s).

In order to understand how and why these protections came about and why even small online businesses should avail themselves of such protection, it’s helpful to understand the history of commerce in general.

Doing Business: A Short History
As stated above, all commerce begins as a simple exchange. You have something I need or want, I have something you need or want, and each of us is willing to give up what they have for the other. Children learn this on the playground early on when exchanging marbles, toys or other items.

Anthropologists speculate that formal courtship and mating rituals among early humans started out as business transactions; men – who did most of the hunting - wanted sex, women wanted meat for themselves and their offspring. Later, this expanded into other sorts of exchanges: hides for dried food, simple jewelry for tools and spear points, etc.


With the development of agriculture and the concept of private property, commerce became a much more complex activity. Agriculture resulted in population growth and the formation of the first urban communities. New kinds of laws were required to sort it all out. Currency, or money, was developed as a convenient way to assign values to a wide range of goods and services, since simple barter exchanges – depending as they did on a “double coincidence of wants” – were rarely practical. For example, suppose I was a furniture maker and you were a wheelwright. I may need a new wheel for my delivery wagon – but you may not necessarily need or want a new table and chairs. Money allowed me to exchange my furniture for something of recognized value that could be easily collected and stored, then used in another, completely different exchange.

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The Origins Of Corporations
Corporations were a very early development. As trade expanded beyond localized areas – as in the case of the Phoenicians, who maintained trade connections from India to present-day Britain – the process of trade became too unwieldy and expensive for one man to deal with. Even one ship loaded with valuable goods represented a considerable investment as well as considerable risk. Early corporations formed for the purposes of (A) raising more capital for business ventures that any one man could raise on his own, and (B) spreading the potential losses so no one individual took the brunt of a liability. Therefore, an association of Phoenician merchants could pool their investments to purchase multiple ships and cargoes, secure in the knowledge that the inevitable loss of one or two ships would not be catastrophic for the investors (lives of the captains and crews notwithstanding).

This relatively simple type of corporate structure continued to be used through Roman times. Typically, these were not permanent organizations however, but groups of investors assembled for a specific purpose. The idea that a group of people could have an identity separate from that of its individual members was a concept introduced by the Germanic tribes that invaded Rome starting in the fourth century of the Common Era. By the Middle Ages, this concept found its way into canon law, which held that the Church organization was more than its members – and that as an organization, it was for all intents and purposes, immortal. This, combined with theories and customs governing the relationship between the organization (in this case, the Church) and its head (the Pope) laid the foundation for the basis of modern corporate law and structures.


Early Modern Commercial Corporations
The first “modern” corporations date from the mid-13th century, formed under crown charters, for the purpose of embarking upon ventures deemed too risky or expensive for an individual or the crown itself. Many corporations were charted by kings and queens for the purpose of establishing commercial colonies overseas. The most famous one in American history was the British East India Company. A series of special tax exemptions extended to this company by Parliament that were denied to small businessmen and local merchants in the colonies was one of the major issues leading to the Revolutionary War. Memory of these abuses kept corporate law in the U.S. firmly focused on protection of the public interest for the first eighty or so years of the Republic. For that reason, many private firms such as U.S. Steel and Standard Oil were set up as limited partnerships or trusts. Eventually, state governments began to relax such regulations, realizing that more permissive corporate laws would result in greater tax revenue. Corporate “enabling” laws were passed in several states, Delaware being one of the first to do so. To this day, Delaware is considered the most corporate-friendly state in the U.S. (see below).

Economic Self-Defense 101: Setting Up Your Business
So far, we have seen that the purpose of setting up a corporation is to protect one’s self and one’s assets – nothing more, and nothing less. That’s the basics, although in practice it’s a bit more complicated than that. The next section deals with the various ways in which businesses set themselves up in order to maximize income and productivity while minimizing potential for loss and liability.