Deciding to form a business is an exciting new adventure that can present a great deal of promise and expectations. You’ll face decisions such as picking a name, location, forming a business plan and strategy, arranging a hierarchy for employees — the list goes on. One decision that must not be overlooked is the type of business entity you want your new venture to become.
There are four types of business structures that are generally considered when a person forms a new company. These include sole proprietorship, partnership, corporation, and limited liability company (commonly known as LLC). Each type has its own pros and cons, and it really comes down to the way you want to do business and what your business offers in order to choose the right business formation.
The process of setting up a new business varies depending on the type of business chosen. Some may require lengthy forms while others require very little. At Shigo Law Firm, P.A., we can discuss which type of business formation will suit your needs while providing the protection the best possible protection for yourself and your assets.
A basic, simple business entity that allows nearly anyone to form. In this arrangement, there is only one owner (the sole proprietor). You may choose to do business under your own name or you can file a d/b/a which stands for “doing business as.” Filing a d/b/a is recommended as a convenience because it allows you to open banking accounts in the name of the business. This can be helpful in keeping your finances separate and under control.
Requirements for starting a sole proprietorship are limited. Depending on the type of business and the area where you will be providing services or products, you may be required to obtain the necessary licensing and permits. Generally this can be accomplished at the local level with your I.D., social security number and by paying a minimal fee.
Sole Proprietorships are very popular because they are quick and easy to establish. However, from a legal stance, sole proprietorships can be very risky. As the sole owner, you are responsible for all debts or lawsuits, which can go after your personal car, home, bank account, and other assets. But the personal-business relationship goes both ways. If your personal finances suffer, such as can happen when going through a divorce or having to file bankruptcy, your business may suffer as a consequence.
When two or more parties decide to form a business together, they can do so as a limited liability partnership. There are two types of partnerships that we see most often: a general partnership and a limited liability partnership.
General partnerships are informal, similar to sole proprietorships. Documentation of the partnership is not required, but we recommend it in order to avoid disagreements in the future. It’s best to have a written agreement between the two parties that outline the relationship and responsibilities. General partnerships have a level of risk involved, especially if one partner is more impulsive. Both parties are subject to debts accrued.
Limited liability partnerships are most often formed when one party wants to be the head of the business and another party is providing the funds, also known as a silent partner. Unlike general partnerships, documentation must be filed with the appropriate secretary of state. During this partnership, the silent owner has no run of the business and is not liable personally for business debts. This arrangement can change if the silent partner becomes actively involved in the management of the business, which would then leave him exposed to personal liability.
We often encourage our clients to forge ahead when it comes to partnerships. It can make raising capital much easier, and sometimes discussion with a partner can lead to better business decision making. However, arguments and disagreements can put pressure on the relationship and the business as a whole, which is why we also recommend consulting an attorney and drafting a written partnership agreement.
Incorporation, or the process of setting up a corporation, involves being chartered by the state and obtaining legal rights. Since the corporation has separate legal standing from the owners, they are considered to have limited liability. This protects the corporation owners from personal liability and legal actions if the company is sued.
Corporations are often held to a higher standard than other businesses. This is because they are overseen by state and federal regulations and are generally much more in view of the public. These types of businesses have appointed board of directors who meet periodically and must record meeting minutes. Often corporations have shareholders who are actively aware of the management and handling of the business. Corporation ownerships can also change through a transfer of controlling stock or interest.
The risk level of a corporation is different from the other forms of businesses. Owners are held to moral and ethical accountability from the public in more visible and vocal ways. And income is taxed as business revenue and personal revenue.
Corporations that do not intend to go public usually choose a sub chapter S for tax purposes. Public corporations would choose to be a C-corporation.
Limited Liability Company
LLCs have risen in popularity. These businesses can be owned by individuals, corporations, other LLCs and even trusts. This allows the business to be taxed as though it is a partnership, which is often beneficial for those involved. The downside is that forming an LLC requires a lot of paperwork, and there are guidelines to follow so that the business does not become taxed in the way a corporation is taxed.
Each business is unique, which is why it’s important to choose the type of business that will suit each individual situation. It all may seem confusing, but that’s why the attorneys at Shigo Law Firm, P.A., are here to help you determine which business formation will serve your business needs while protecting you.