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In making a choice of how your business will be structured, you will want to take into account the following:
- The size and scope of business you hoping to attain
-
The level of
control you wish to have
-
The level of
structure you are willing to deal with
-
The
business's vulnerability to lawsuits
-
Tax
implications of the different ownership structures
-
Expected
profit (or loss) of the business
-
Whether or
not you need to re-invest earnings into the business
-
Your need for
access to cash out of the business for yourself
The
4 basic legal forms of ownership are:
Sole
Proprietorship
Partnership
Corporation
Limited Liability Company
CHARACTERISTICS
OF EACH LEGAL FORM:
Sole
Proprietorship
This is the
easiest and least costly way of starting a business. A sole proprietorship
can be formed by finding a location and opening the door for business.
There are likely to be fees to obtain business name registration, a
fictitious name certificate and other necessary licenses. Attorney's fees
for starting the business will be less than the other business forms
because less preparation of documents is required and the owner has
absolute authority over all business decisions.
Partnership
There are
several types of partnerships. The two most common types are general and
limited partnerships. A general partnership can be formed simply by an
oral agreement between two or more persons, but a legal partnership
agreement drawn up by an attorney is highly recommended. Legal fees for
drawing up a partnership agreement are higher than those for a sole
proprietorship, but may be lower than incorporating. A partnership
agreement could be helpful in solving any disputes. However, partners are
responsible for the other partner's business actions, as well as their
own.
A
Partnership Agreement should include the following:
 Type
of business.
Amount
of equity invested by each partner.
Division
of profit or loss.
Partners
compensation.
Distribution
of assets on dissolution.
Duration
of partnership.
Provisions
for changes or dissolving the partnership.
Dispute
settlement clause.
Restrictions
of authority and expenditures.
Settlement
in case of death or incapacitation.
Corporation
A business
may incorporate without an attorney, but legal advice is highly
recommended. The corporate structure is usually the most complex and more
costly to organize than the other two business formations. Control depends
on stock ownership. Persons with the largest stock ownership, not the
total number of shareholders, control the corporation. With control of
stock shares or 51 percent of stock, a person or group is able to make
policy decisions. Control is exercised through regular board of directors'
meetings and annual stockholders' meetings. Records must be kept to
document decisions made by the board of directors. Small, closely held
corporations can operate more informally, but record-keeping cannot be
eliminated entirely. Officers of a corporation can be liable to
stockholders for improper actions. Liability is generally limited to stock
ownership, except where fraud is involved. You may want to incorporate as
a "C" or "S" corporation.
If you are unsure which legal form is best for you, contact your local Small
Business Administration for assistance with deciding. |
