Starting a business response
Hi, I am a business coach and I am in the middle of putting my system to paper so that I can provide it to my clients, so the info you are asking for is top of mind for me. I am including some information from my system, hopefully it will help. I have listed your options for business legal set up, although I do suggest you speak with a lawyer to make sure you dot all the i's. I have also listed the some other suggestions below that to help distinguish between options based on how you are set up.
The sole proprietorship is a simple, informal structure that is inexpensive to form. It is usually owned by a single person or a marital community. The owner operates the business, is personally liable for all business debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns.
Limited Liability Company (LLC)
The LLC is generally considered advantageous for small businesses because it combines the limited personal liability feature of a corporation with the tax advantages of a partnership and sole proprietorship. Profits and losses can be passed through the company to its members or the LLC can elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate formalities. Owners are called members, and the LLC is managed by these members or by appointed managers.
Partnerships are inexpensive to form; they require an agreement between two or more individuals or entities to jointly own and operate a business. Profit, loss, and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return. Short-term partnerships are also known as joint ventures.
C Corporation (Inc. or Ltd.)
This is a complex business structure with more startup costs than many other forms. A corporation is a legal entity separate from its owners, who own shares of stock in the company. Corporations can be created for profit or nonprofit purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed both at the corporate level and again when distributed to shareholders.
Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to do so may open the shareholders to liability of the corporation's debts.
Corporate formalities include:
Issuing stock certificates
Holding annual meetings
Recording the minutes of the meetings
Electing directors or ratifying the status of existing directors
Corporations should always be assisted by a qualified attorney.
Sub Chapter S Corporation (Inc. or Ltd.)
This structure is identical to the C Corporation in many ways, but offers avoidance of double taxation. If a corporation qualifies for S status with the IRS, it is taxed like a partnership; the corporation is not taxed, but the income flows through to shareholders who report the income on their individual returns. The forming of any type of corporation should always obtain the assistance of a qualified attorney.
What to Think about When Choosing the Structure
1. How Much Do You Want to Spend? A sole proprietorship or general partnership can be the least expensive and are a good option for individuals who really want to keep there business simple and don’t expect to expand immediately, or in some cases, ever. A limited partnership and a limited liability company are more expensive to set up. Setting up a corporation can be a very expensive and individuals should consider getting the legal assistance to set up the corporation correctly.
2. What is your “complexity tolerance”? A sole proprietorship and general partnership structure are both easy to set up sometimes only requiring a business checking account to get started. A limited partnership, limited liability company, and corporation involve more work. As with cost, if the business is pretty straightforward, and there are only a few people involved with the business, keeping everything simple might make the most sense. However, it should be noted that businesses can get complicated fast, and if there are more than a few people involved and a general partnership is chosen as the structure, a clear written contract of rights, responsibilities, roles should be taken seriously. The more people involved, the greater the risk of confusion and problems. Taking the “easy” route is not always the best thing.
3. How much information about your business will be available for public access? Corporations are required to provide more information to the state, which then becomes public information. Less information is necessary for a Limited Liability Corporation or limited partnership, while sole proprietorships and general partnerships maintain a great deal of privacy. If privacy is important, your structure should be considered carefully.
4. Are you risk averse? In the sole proprietor and general partnership, owners and partners are personally liable for business debts and obligations. Single proprietors have the most control of the money borrowed, but need to be aware that the business offers no shelter from failure or loss. Money borrowed for the business is the same as money borrowed by the owners. Partnerships have the same type of risk. Again, agreements should be made beforehand if partners are going to borrow for business without the protection of a corporation. Never enter into a partnership without first understanding all the risks to you personally.
5. Who has operational control? The form of the business entity may dictate how it is operated. A sole proprietorship provides the businessperson the greatest degree of control as well as the greatest degree of risk.
6. How will the business be capitalized? Sole proprietors and partnerships often bring their own capital to the table. How a business is structured will have a bearing on whether capital can be raised from other sources. Since a sole proprietor or partnership is responsible for the debt of the business, it may be more difficult to get funding. A LLC or limited partnership may have more options.
7. How will the business be sold? A sole proprietorship is easy to sell; usually you sell the assets of the business, and your business ceases to exist. Selling a partnership interest or a member's interest in a limited liability company can be tricky because it requires approval of the other partners or members.
8. What is the plan for future growth? Every entrepreneur wants to be as successful as possible. Most think that they will manage the growth as it happens. However it is important to consider what happens to the structure of the business if it grows quickly. Thinking about that early on can help avoid growing pains, simply because the right business structure was chosen at the outset.