By Payton Hostens
You have made the decision to start your own business. Now what?
There are several items to consider to make sure your business starts out on the right foot and to avoid issues down the road.
Do I need to form an entity?
No, there generally is no requirement to file legal paperwork to form an entity to start a business. You can simply “hang up a shingle,” as they say, and start doing business.
If you do not form an entity, you will be operating as a “sole proprietor” (if the business is owned by only you) or a “general partnership” (if owned by you and one or more others), and you will generally be liable for the debts and obligations of the business.
To limit your personal liability, you may choose to form an entity. Two common entities that offer liability protection are limited liability companies (LLCs) and corporations. Subject to a few exceptions, members of an LLC and shareholders of a corporation are generally not personally liable for the debts or liabilities of the LLC or corporation. In order to form an entity, you will need to file the appropriate paperwork in the state where you wish to form the entity.
Which entity is best suited for my business?
Selection of the type of entity to be used is largely driven by taxation and how owners desire profits and losses to be shared.
Unless it files an election to be taxed as a subchapter S corporation, for tax purposes, an LLC owned by one person is treated as a disregarded entity and an LLC owned by two or more people is treated as a partnership.
Unless it files an election to be taxed as a subchapter S corporation, a corporation is taxed as a C corporation. LLCs are generally considered to be more flexible, in that they do not require adherence to corporate formalities and, subject to certain taxation rules, permit allocations of profits and losses in proportions different from the members’ ownership interests.
What else should I consider?
If more than one person will own the business, consider having a Members Agreement or Shareholders Agreement, which typically contains restrictions on an owner’s ability to transfer its interest in the business and includes up-front agreement from the owners on what happens if one owner wants out or certain events occur.
If more than one person will own the business, you will also want to make sure you have a well-drafted and thought-out Operating Agreement that sets out who will have the right to manage or make certain decisions on behalf of the business.
If you will be performing a professional service through the entity, like a doctor or real estate agent, then you may need to comply with additional requirements.
It is important to structure your business in a way that aligns with your goals. Contact Payton Hostens at [email protected] to learn more.