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When starting a new business, several key decisions must be made regarding the organization, financing, management, and operation of the business. First, you should do your homework – research your business idea and prepare a business plan. Once you’ve decided to go ahead with your idea, you will need to determine the legal structure of your business (whether a sole proprietorship, partnership, LLC, corporation, non-profit, or a cooperative) and obtain financing for the start-up costs. After your business is formed, it must be registered with your state or local government – typically through filing a fictitious business name, or “Doing Business As,” statement – and obtain any permits and licenses required by your city or county. Certain industries require additional permits, such as a seller’s permit, or a license to sell alcohol. Finally, businesses must register for state and local taxes, typically including obtaining a tax identification number from the IRS. Upon formation of the business, then it is usually recommended the business establish policies and procedures for employment, operations, recordkeeping, and other important matters.
There are several advantages to organizing your business as a formal corporation. A corporation is a separate legal entity that is distinct from its individual owners. Businesses that incorporate according to the requirements of state law are provided a “corporate veil” for the business owners. That means that the owners’ personal assets are protected and are typically not used to pay any corporate debts or liabilities. While the limited liability is one of the most important advantages to forming a corporation, there are also tax advantages and it is often easier to attract investors if a business is incorporated.
A Limited Liability Company (LLC) is a form of business organization which combines some of the benefits of a corporation with some of the benefits of a sole proprietorship. Owners of an LLC enjoy the limited personal liability for mistakes or misconduct of the business that owners of corporations enjoy. However, LLC owners are not subject to the same tax implications as a corporation. Further, an LLC offers its owners quite a bit of flexibility to determine how the business is going to be managed and how income is going to be allocated among the owners.
Limited liability is a principle of business law which shields the owners of a business from the business's liabilities. Owners of a business which has limited liability may lose only what they have invested in the business, meaning creditors cannot reach to the owner's personal assets to cover the businesse's debts. If a business is sued or goes bankrupt only the assets of the business may be used to cover the debt, a stockholder may not be forced to sell their home or other property to cover their share of the company's debt. Businesses that have limited liabilty are corporations, limitied liability companys (LLC) and limited liability partnerships (LLP).
In a business that is a sole proprietorship or a partnership the owners are personally liable for the business's debts.
There are several different types of corporations from which business owners can choose when they initially set up their business. One type of corporation is an S corporation. The “S” in “S Corporation” refers to Chapter 1, Subchapter S of the United States Internal Revenue Code. Owners who choose to incorporate an S Corporation are choosing not to have the Corporation pay income taxes but rather to have each shareholder pay personal income tax (or report a loss) on the shareholder’s proportionate share of income (or loss) from the S Corporation. In order to elect to incorporate as an S corporation, the company must have only one class of stock and not more than a certain number of shareholders. Since all of the shareholders are responsible to the IRS and state revenue department for their proportionate share of the corporation’s profits or losses, all of the shareholders must be US citizens or residents and must be people and not other legal entities (such as other corporations, LLC or LLPs.)
A C corporation is the most common type of corporation. The “C” refers to the subchapter of the Internal Revenue Code which explains the rules of taxation for this type of business structure. C corporations may have any number of investors and it can, therefore, be easier to raise the capital necessary to operate the business. Since the number of investors is not limited, C corporations can offer stock incentives to their employees. Corporate owners usually do not have personal liability for corporate debts or negligence. Some businesses also find that it is less expensive to provide health insurance and retirement benefits for employees if their business is properly incorporated as a C corporation.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified business lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local business attorney to discuss your specific legal situation.