An economy such as the current one tends to leave many people unemployed. For many, this is seen as an opportunity to pursue a life-long dream of entrepreneurship — starting one’s own business, being the boss, building a legacy for your family, etc.
But before you open that business (or buy an existing business), there are some questions that have to be answered. The answers to those questions will have an impact on the steps you take to start and grow the business.
First, what legal form of business should you choose? A Sole Proprietorship, Corporation, Partnership, LLC or LLP? And are you going to operate a for-profit business or a not-for-profit? These are important threshold questions that you need to answer before you take any other steps toward starting your business because the answers dictate what steps you will take next.
If you’re buying an existing business, there are two ways to accomplish that. For example, let’s say you want to buy the hardware store on the corner. Let’s also assume it’s owned by a corporate entity, with one or just a few shareholders. You can buy their shares in the corporation that owns the hardware store business, or you can form your own business entity and then buy all the assets of that hardware store. This can even include the right to continue to use the name and rights to the telephone number, etc. There are positives and negatives to each path and consulting with an experienced and competent business attorney can help you choose the one that’s right for you.
If you’re in business by yourself, a Sole Proprietorship is the simplest form, from a legal standpoint — you just open your doors, and conduct business as an individual. There are few filing requirements (although you will want to file a Certificate of Assumed Name to reflect the name of your business). All income and expenses go on schedules on your personal tax return.
A pretty simple setup; however, the downside is that you maintain personal liability for many potential risks. Suppose a customer slips and falls in your store? Your personal assets, including your home and savings, can be subject to any judgment that injured customer may get against you. And trying to protect your assets after that fall happens can be difficult to do —, and can even be considered improper in the eyes of the law and therefore undone by a court. There are a number of other potential liabilities which can be collected against your personal assets as well, making Sole Proprietorships the riskiest form of business entity.
So you should consider a business form that limits liability to the assets of the business itself, rather than your personal assets. These include Corporations, LLC’s (Limited Liability Companies) and, if you have one or more partners in your business, even LLP’s (Limited Liability Partnerships). Corporations and LLC’s can have a single shareholder or member, so even if you are in business by yourself, they are available forms.
The single biggest advantage of all those forms is the liability shield. The extent of that shield varies from form to form but, in general, all provide more protection than a sole proprietorship.
Corporations can even elect to be taxed like a partnership (i.e., the net share of profit or loss flows through to the individual shareholders and the corporation itself pays no income taxes), called a Subchapter-S Election.
Each of those types of business entity has different filing requirements — both at start-up and on a continuing basis — so it makes sense to discuss your plan in detail with a good business attorney and a good accountant prior to making your choices.
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