I know how confusing this issue can be, that of deciding the best legal entity to select in order to operate a new business. I'll provide some initial insight to provide a basic answer to your question, opening up this thread to more additional comments by many of the other experienced forum members.
My experience is with Corporations, LLCs, Non-profit corporations, and Foundations. It's been MANY years since I've been involved with the other entities (partnership's, Sole P's), so I suggest you verify all I'm relating here, since some things can, and do change, and I am not an attorney or accountant. Maybe other forum members may add additional clarifications and input.
If you're not expecting to earn a large income, but view it as simply additional, then simplicity is likely the order of the day. But if you have lofty goals of a larger company, then you may desire to review corporate and LLC benefits. Personally, I would NEVER be involved in a sole proprietorship or general partnership again. This is not to suggest they don't have their place, or not right for some people, but if a person plans to establish and operate a truly successful business they should do it all the way, meaning to their fullest and best advantage.
One issue you are facing is the fact you and your relative live in different states adding confusion to this issue. Once you decide on the right business structure for your business, we can address this issue.
A plan of action is needed to fulfill the goal of being your own boss and running a successful business. Success lies in the approach you choose to take, and this info should help you with facts regarding early business formation.
Business Partnerships - Advantages and Disadvantages
In creating the type of business formation known as a Business Partnership, two or more people share ownership of a single business. The shared ownership concept that characterizes the Business Partnerships afford distinct advantages and disadvantages. Like Sole Proprietorships, the laws do not distinguish between the business and its owners. Whereas the LLC gives you both options.
The Business Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future business partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. Its difficult to think about a "break-up" when the business is just getting started, but many business partnerships split up at crisis times and unless there is a defined process, there will likely be problems. They also must decide up front how much time and capital each will contribute.
Advantages of a Business Partnership
* Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
* With more than one owner, the ability to raise funds may be increased.
The profits from the business flow directly through to the partners' personal tax returns.
* Prospective employees may be attracted to the business if given the incentive to become a partner.
* The business usually will benefit from partners who have complementary skills.
Disadvantages of a Business Partnership
* Business Partners are jointly and individually liable for the actions of the other partners.
* Profits must be shared with others.
* Since decisions are shared, disagreements can occur.
* Some employee benefits are not deductible from business income on tax returns.
*The partnership may have a limited life; it may end upon the withdrawal or death of a partner.
* I've witnessed major business problems among family members, which can, and often destroys family relationships. This applies to ANY business entity, corporation or otherwise.
Summing Up: The Pros and Cons
* Owners can start partnerships relatively easily and inexpensively.
* They do not require annual meetings and require few ongoing formalities.
* Partnerships offer favorable taxation to most smaller businesses.
* They often do not have to pay minimum taxes that are required of LLCs and corporations.
Questions that should be decided before entering into a Business Partnership Agreement:
* Are Partners allowed to participate in activities in competition with the Partnership?
*For what time period is a Partner prohibited from competing after withdrawal?
*Should Partners be compensated for services in addition to share of profits?
*What is the voting percentage required to amend any part of this Agreement?
*What percent of vote is required to dissolve the Partnership?
*How will Partnership assets be distributed on Dissolution or Dissociation?
Advantages of a Sole Proprietorship
* Owners can establish a sole proprietorship instantly, easily and inexpensively.
* Sole proprietorships carry little, if any, ongoing formalities.
* A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
* Owners may freely mix business or personal assets.
Disadvantages of a Sole Proprietorship
*Owners are subject to unlimited personal liability for the debts, losses and liabilities of the business.
*Owners cannot raise capital by selling an interest in the business.
*Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
* Their business posture, i.e. image, is often less respected than a more formal structure like an LLC or corporation. People tend to feel safer doing business with companies they percieve as "Professional," especially when making online purchases. Your situation doesn't seem to apply in this case.
Forming a Sole Proprietorship
You may already be operating a sole proprietorship. One of the great features of a sole proprietorship is the simplicity of formation. Little more than buying and selling goods or services is needed. In fact, no formal filing or event is required to form a sole proprietorship; it is a status that arises automatically from one's business activity.
You may need to meet local, regional, and state requirements such as filing a DBA (fictitious Name unless you are just using your own name), obtaining local business licenses (City and/or county), and possibly an occupational license.
legal entity selection process
Once the entrepreneur has determined the goods or services the company will offer and whether there is a market for the product, a decision must be made on the type of business formation. You're at this point. The best choice is not always obvious. You will want to take into account the following:
* Your vision regarding the size and nature of your business.
* The level of control you wish to have.
* The level of "structure" you are willing to deal with.
* The business's vulnerability to lawsuits.
* Tax implications of the different ownership structures.
* Expected profit (or loss) of the business.
* Whether or not you need to re-invest earnings into the business.
* Your need for access to cash out of the business for yourself.
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. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name, such as Billy Bob's Auto Repair. The fictitious name is simply a trade name--it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business's debts. So, if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money.And, you have the complexity and confusion of owners living in different states.
The owner of a sole proprietorship typically signs contracts in his or her own name, because the sole proprietorship has no separate identity under the law. The sole proprietor owner will typically have customers write checks in the owner's name, even if the business uses a fictitious name. Sole proprietor owners can, and often do, commingle personal and business property and funds, something that partnerships, LLCs and corporations cannot do.
Sole proprietorships often have their bank accounts in the name of the owner. Sole proprietors need not observe formalities such as voting and meetings associated with the more complex business forms. Sole proprietorships can bring lawsuits (and can be sued) using the name of the sole proprietor owner. Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops.
Because a sole proprietorship is indistinguishable from its owner, sole proprietorship taxation is quite simple. The income earned by a sole proprietorship is income earned by its owner. A sole proprietor reports the sole proprietorship income and/or losses and expenses by filling out and filing a Schedule C, along with the standard Form 1040.
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