Two Important Decisions
There are two decisions every entrepreneur must make fairly early in the life of a startup business.
- Will you go into business alone or with a partner?
- What type of legal business organization will you use?
Alone or with a Partner?
Anybody who has been married or divorced certainly knows what a large decision this is. Often, one spends more time with one’s partner than with one’s spouse. Tread carefully into partnerships. Use this listing of partnership advantages and disadvantages in deciding whether you want to be in business alone or with a partner.
If you have decided you don’t want to be in business alone and yet you don’t want a partner, go to the “Recession Proof Business” page to find out how you can leverage your time and efforts without a partner.
The Business Organization You Choose…
…is one of the most important decisions you make. Your decision affects your level of risk, the taxes you pay, and how much accounting help you will need.
The choices for your business organization and a brief description are:
- Sole proprietorship—a sole proprietorship has no separate legal existence from its owner. Liabilities for business debts are not limited to assets of the business. The owner of the business is responsible for all debts incurred by the business. The owner can have the business under his/her name or “doing business as” (DBA). The business, since it is not a separate legal entity, does not file a separate tax return. Accounting for a sole proprietorship is the most simple of legal forms.
- Partnership—a partnership consists of two or more individuals who co-own a business. Although the business is not taxed separately, it must prepare a return which indicates the distribution of partnership profits and losses to the co-owners. The amount of money and time invested by each partner should be written down in a partnership agreement. In a partnership, any partner can be held liable for the entirety of the business’ debts.
- Limited partnership—a limited partnership is similar to a partnership except that there are one or more general partners in addition to one or more limited partners. The general partners are in the same position as partners above, having authority to act as agents of the partnership, having management control over the business, and being liable for the debts of the business. The limited partners, on the other hand, have limited liability, meaning they are only liable to the extent of their investments. Limited partners do not have authority over the management of the business. They invest in the business and receive a share of profits and losses as stated in the partnership agreement.
- Corporation—a corporation is a legal entity separate from the persons that formed it. Owners of a corporation are known as shareholders. The shareholders elect a Board of Directors who hires managers to manage the corporation. In a small corporation the owners, directors and employees may be the same people. Accounting for a corporation can be more complicated than for other forms of organization. The corporation is taxed on its profits and owners may receive dividends which are taxed again.
- “S” Corporation—an “S” corporation is one that has made an election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Subchapter S corporations do not pay federal taxes. Instead, profits and losses are divided among the corporation’s shareholders who then report them on their income tax returns. “S” corporation owners thus enjoy the advantage of limited liability and profits are not subject to double taxation. However, accounting systems are as complicated as regular corporations. There are certain legal restrictions to your ability to form an “S” corporation. There may also be tax situations where a regular corporation is advantageous to an “S” corporation.
- Limited liability company (LLC)-an LLC is a legal form of business that offers limited liability to its owners and is also a type of corporation. It provides its owners with characteristics of both a corporation (limited liability for it owners) and a partnership or “S” corporation (pass-through income taxation, meaning owners are taxed only at the individual level, not at the company level first). LLCs have become very popular for their flexibility and they are often well suited for a single owner. However, LLCs may have a more difficult time raising capital with an eye toward an Initial Public Offering. (See also the “Money for Starting a Business” section on Venture Capital.) Also, many states levy a franchise tax which a partnership or a sole proprietorship would avoid.
If you have decided to form an LLC or a corporation your question may be, “Which one?” The answer isn’t always clear — but because your choice will affect the legal and tax status of your business, it’s the most important question you’ll need to answer. “LLC or Corporation?” will help you make the right choice with plain-English explanations.
LLC or Corporation: How to Choose the Right Form for Your Business
If you Decide to Incorporate or Form an LLC
Instead of hiring an attorney (which will cost between $1,500-$2,500 on average) or facing the uncertainties of doing it yourself, check out entity formation companies. They provide the guidance of an attorney without the expensive fees.
Incfile offers entity formation with only the cost of state fees. Read our detailed review of Incfile.
Incorporate Yourself
Set up a corporation, skip the lawyer, save money! “Incorporate Your Business” lays out everything you need to know about corporate laws and regulations in your state, clearly explaining:
- Why and when to incorporate
- What you need to know about corporate taxation
- Whether to elect S corporation tax status
- How to incorporate an existing business.
Plus, you can save thousands of dollars in attorneys’ fees by incorporating a business yourself — “Incorporate Your Business” guides you through each step. In the end, your business will enjoy a number of advantages. Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State
You Now Know…
There are many decisions which an entrepreneur has to make. Among them are whether to take on a partner and the type of business organization the entrepreneur chooses. You now know:
- The advantages and disadvantages of partnerships.
- The legal business organization you choose needs to be appropriate to your business. There are many choices and this decision has great consequences.
- How to incorporate inexpensively.
- How to incorporate yourself.