When owners are setting up a business or restructuring, there is a lot to think about. Although the substance of the business is probably the most interesting and compelling to think about, owners can’t afford to skip over giving proper attention to the formation of the business entity. Determining which structure is most suitable and then ensuring that the entity is set up correctly is the first step toward running a successful business.
To make sure that owners have considered all of the ramifications of each alternative and chosen the best form for your business, work with an experienced corporate attorney. Once you’ve chosen the right type of entity for your purposes, the attorney can assist you in fulfilling all of the legal requirements necessary to establish the entity and protect your interests.
Forming a Sole Proprietorship
A sole proprietorship is the simplest type of business entity, which leads many people starting up small businesses to overlook important considerations. While no formal process is required to create a sole proprietorship as would be to form a corporation or partnership, there’s more to starting a business than printing your business cards and setting to work. Depending on your industry and your geographic area, licensing may be required, there may be specific insurance requirements or there may be other necessary formalities. For example, you will need to verify that the business name isn’t already in use, and may need to set up d/b/a accounts or otherwise associate your business name with your name and social security number.
Forming a Partnership
The formation of a partnership requires many of the same steps described above for a sole proprietorship. The key difference, of course, is the need for an agreement among the partners that establishes the rights and responsibilities of each. A partnership may be simple or complex, depending upon the nature of the business, the number of partners and the type of partnership being created. These generally fall into three categories: general partnerships, limited partnerships and joint ventures.
However, every business is different. In addition to the different considerations applicable to each type of partnership, varied provisions will be required based on the type of business, the relationship of the partners, relative contributions and other factors. Attempting to form a partnership on your own or through the use of basic forms can leave gaps that will cause trouble for you, your partners or your business later.
Limited Liability Companies (LLCs)
A limited liability company (LLC) is a simplified type of corporation, which provides some of the tax benefits and protections from personal liability of a corporation with the greater autonomy afforded a partnership. In addition to the elements discussed with regard to sole proprietorships and partnerships, an LLC is required to file articles of organization with the Secretary of State or other department of the relevant state government. It is also in the best interests of the members of an LLC to execute an operating agreement before commencing operations. This agreement will spell out the rights and responsibilities of the members, as well as establishing allocation of profits and losses.
The first step toward creating an S corporation (S corp) is to incorporate. Then, when the corporation has been established, you will file an election with the IRS for S corp designation. If you know that you want to operate your business as an S corporation, you will want to discuss your business with an attorney familiar with the formation of S corporations before you take any action, to ensure that your business qualifies and your articles of incorporation are properly constructed.
Because an S corporation is itself not a taxable entity and the shareholders are taxed directly, there are additional considerations, such as the need to pay any shareholder providing services to the corporation a fair market salary. Failure to do so may result in the shareholder’s corporate earnings being reclassified as wages.
A C corporation is the business entity most fully separate from its owners. As such, it is a taxable entity in its own right and also provides the greatest protection from personal liability of any type of business. A C corporation also offers the greatest flexibility for the future, in that it can continue to operate if one or more owners leaves the company, and can bring in new capital and new shareholders through stock sales. That doesn’t necessarily mean, though, that operating as a C corporation rather than electing S corporation status is best for all businesses. There are advantages and disadvantages to each. For example, C corporations are subject to “double taxation,” meaning that the corporation itself is taxed on profits, and then shareholders are taxed on payouts.
Contact KPPB LAW Today For More Information
Deciding on the right form for your business and then ensuring that you’ve properly attended to all necessary agreements, licenses, filings with the state, disclosures, insurance requirements, payment structures and other requirements can be complicated and confusing. Our experienced attorneys can assess your business plans and discuss the pros and cons of each option with you, then work with you to create the necessary documents and establish your business entity.
These formative agreements and filings will be the foundation on which your business is built, so you can’t afford even small flaws that might destabilize your operations after the business is underway. If you would like a better understanding of how our attorneys can help with business entity formation, please contact KPPB LAW by giving us a call or sending us a message online today.