So, you have decided to start a business. Now what? Starting a small business can be a challenging yet rewarding process. In addition to planning how you will sell the services or goods, the small business owner must become an expert in marketing, supply management, networking, customer service, and employee oversight. However, before any of those things, you must decide what type of business entity best serves your needs. There are benefits and burdens associated with each type. Generally speaking, the business entity types that require the most up-front work in formation and oversight will offer the most robust protection for each owner.
A sole proprietorship is the most accessible business type to start. This is a business wholly owned and operated by one individual. That individual is entitled to all profits for the business but is also liable for any debts or liabilities incurred. While there is no paperwork filing requirement with the government, you should still file your business with the register of deeds for your county. Generally, the owning individual is responsible for the sole proprietorship’s tax obligations. While the tax benefits and complete control may seem ideal, this business type is generally ill-advised. The potential liability offsets the benefits provided by its simplicity.
Another business type is called a partnership. This is probably the simplest among the business types for more than one owner. It is owned and operated by partners. Partners are held personally liable for all debts, taxes, and other potential liabilities imposed on both the partnership and the other partner operating for the partnership. No written agreement is required, but it is always important to have governing agreements in a writing of some kind. The partnership is very flexible and simple to start, but the dangers associated with liability and conflict resolution make it a less favorable choice than other business types. There are other types of partnerships as well (such as limited partnerships or limited liability partnerships). Still, the benefits of these business types are largely covered by the limited liability company, as discussed a bit later.
The corporation is a very familiar business type. Many large businesses operate as corporations. A corporation’s decisions are made by a board of directors, and a corporation’s shareholders invest into the corporation and receive back amounts based on the income. Of all the business entities, corporations often require the most formalities. Among these required formalities are yearly, quarterly, or even monthly board of director meetings, notice requirements before significant entity events (such as adding additional shareholders), etc. However, as discussed above, with these additional formalities comes additional protections from liability. The corporation “is its own person” and is responsible for its own obligations. While the corporation’s tax treatment can be less than favorable, some businesses can qualify for “S-corporation” treatment and receive tax treatment that mirrors the limited liability company, as discussed below.
Limited Liability Company
The Limited Liability Company (the “LLC”) is a relatively new business type (having existed for the last forty years or so); it has since become the most common choice for businesses in most states. It’s a common choice because the LLC provides a very useful balance between the flexibility of the partnership with the protection of the corporation. To form an LLC, “Articles of Organization” must be filed with the Secretary of State’s office, and annual reports must be filed as well. An Operating Agreement should be drafted to govern the affairs of the business. An LLC is owned and operated by the members or managers. By default, LLC’s “pass through” their tax obligations to the owners, and the owners of the LLC pay taxes on their share of the LLC’s income. However, an LLC may elect to be taxed like a traditional corporation (“C-corp.”) as well. There, taxes are paid by the entity itself as well as the owners. Unlike the Corporation, there exists a great deal of flexibility regarding meeting times, procedures for making decisions, and other provisions for operating your company.
There are some special considerations for non-profits that you should also consider. Depending on the activity in which your business is engaged, you may be able to form a non-profit “501(c)(3)” corporation such that you can receive significant tax benefits. If you hope to operate as a non-profit, be sure to mention that to an experienced attorney to see if you qualify.
There are specific rules for businesses offering professional services (such as lawyers, accountants, and physicians). Be sure to ask an attorney whether you need to form a “Professional LLC” or “Professional Corporation” based on the services you intend on providing.
Whether you need assistance in starting your small business, organizing your business, or managing liability concerns within your existing business, we can help. Call King Law today at 866-318-6086 (KING) to discuss options for incorporation or forming an LLC. Our attorneys are experienced in drafting articles of organization, articles of incorporation, bylaws, operating agreements, board resolutions, filings with the Secretary of State, and other important corporate documents.