Start Up | Business Types | Choosing the best business structure
How to choose a legal business structure and type.
When you are going into business, one of the first steps (and a very important step) is choosing the proper business type and structure - the legal structure for your company.
A more important step is to be sure of the name you choose. Learn more >>
In being sure of your name (company, product or your own name) and/or what people could find out about you on the Internet, or be mistaken, I suggest you Google all of the email addresses you use, your own name, and other relevant names such as product and company names you use, or plan to use - and see what you find in the results. There are people like Michael Fertik, who are dedicated to protecting you and your company's digital reputation.
Most businesses will need some sort of credit at some point, and so knowing your credit score is important now and in the future. Also, if you plan on establishing a corporation or LLC, consider separating your business and personal credit profiles.
You can and should avoid partnership problems by addressing all issues at the outset and building solutions into the partnership agreement. Learn more >>
carefully about your business
The basic business entity types:
The two main factors typically involve legal liability and tax considerations in relation to the details of the business, yet there are other considerations to take into account.
A brief explanation of each business type:
sole proprietorship means that you are the sole owner. Nearly everything
you need to do to create a sole proprietorship is fairly simple and does
not typically require an attorney, accountant, or business consultant regardless of the state in which you are doing business.
However, in all cases, some professional help insures a better outcome.
In a sole proprietorship, your business is controlled by you, all of the profits come to you, and you make all the decisions. With this type of business entity, you have complete freedom over operating your business. In most of the other business types you have to report to other people and share in any decision making.
As a sole proprietor, you are less burdened by government restrictions and control, and you have less to do in terms of reporting and taxes.
The disadvantages of a sole proprietorship include unlimited liability. If your business is sued, you and your personal assets are at risk. Also, a sole proprietorship may incur greater difficulties in raising capital, and you may have to use your own money or personal loan for the business.
Since sole proprietorships
involve no stock shares, it may be more difficult to find employees who
want to own a portion of the company they are working for.
Some minor formalities may require you to:
In certain cases, Rob Cummings believes that agreements of mutual benefit between individuals (where individuals remain sole proprietors yet agree to work together) may be the best way to start a business, and may be the best way to maintain a business.
Avoid partnership problems by addressing all issues at the outset and building solutions into the partnership agreement. Learn more >>
Other types of businesses require other structures such as:
A partnership is an association of two or more people
sharing ownership and control over the business.
In simplest terms, a partnership is like a marriage, and like a marriage, many aspects should be considered, discussed and resolved before forming a partnership.
avoid disagreement regarding the amount of time and energy each partner
invests in the business (and other aspects), it's a good idea to create a legally binding partnership agreement between all of the
Upside of a partnership:
Downside of a partnership:
sanctioned by the state, is considered a separate entity from those who own it.
Separating business and personal obligations is one of the major advantages of a Corporation.
Many creditors will want a personal guarantee from one of the officers when dealing with a new corporation. Therefore, it's a good idea to work towards completely separating your business and personal credit when you form a corporation. Leading financial institutions offer a variety of business credit card programs. No matter which financial institution you choose, separating personal credit from business credit helps build the corporations' own credit and keeps business and personal charges separate for accounting purposes.
is formed by selling shares to its owners. These owners elect a board of directors to oversee the company. A corporation does not
necessarily dissolve when ownership changes.
Corporations can raise money by selling stock. A corporation can also deduct the cost of benefits for its officers and employees.
Limited Liability Companies
can combine the advantages of corporations of limited liability with the control and tax advantages of a partnership.
The limited partner is protected by law because the limited partner's legal liability in the business is generally limited to the amount of his or her investment. It enables this special type of investor to share in the partnership profits without being exposed to its debts in the event the company goes out of business. This protection exists as long as the limited partner does not play an active role in the partnership operation.
Operating as a corporation has certain disadvantages in certain situations:
Many choose to form a corporation so that, as shareholders, the partners are not as legally liable for the actions of the corporation i.e. as a separate entity, the corporation is legally seen to be apart from those who operate it.
There are a number of other benefits:
Unlimited life. Unlike proprietorships and partnerships, the life of the corporation is not dependent on the life of a particular individual or individuals. It can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Unless stated otherwise, it could go on indefinitely.
With corporations, all of the individual owners' rights and privileges are represented by the shares of stock they hold. The key to a quick and efficient transfer of ownership of the business is found on the back of each stock certificate, where there is usually a place indicated for the shareholder to endorse and sign over any shares that are to be sold or otherwise disposed of.
An LLC is a hybrid entity with:
LLCs are treated in a similar manner to S corporations for tax purposes.
Some additional advantages of LLC's over S corporations (in some situations):
You can form an LLC for any lawful business as long as the nature of the business is not banking, insurance, and certain professional service operations.
We certainly recommend that you consult with a lawyer and accountant about the advantages and disadvantages of each option in your particular state.
By simply filing articles of organization with the respective state agency, an LLC takes on a separate identity. Similar to a corporation, but without the tax problems of the corporation, it will be taxed like a partnership.
'organizations' are comprised of a number of LLCs.
Rob Cummings believes that partnerships can work as long as the responsibilities of each of the partners is clearly spelled out and understood, and the partners have assessed all of their personal and professional interests. It's a critical component often overlooked, and a leading cause of business failure. Therefore...
In addition to helping partners agree in advance, Cummings will:
We believe that many businesses fail due to 'poorly founded' partnerships and agreements between people - as opposed to operational problems.
potential partnership problems, we act as partnership counselor in
developing better partnership agreements that help insure 100% partnership
satisfaction by addressing the personal and professional needs of each
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