These decisions are never easy, and always complicated
if not downright confusing. We take a look at some of the pros and cons
of starting your business as a corporation versus an LLC, as well as
considering some of the other possible options.For most
businesses these choices include: • sole proprietorship •
partnership • limited partnership • corporation •
limited liability corporation (LLC) • “S―
corporationWe’ll take a look at each of these options, but only
with an important caveat: ultimately you must make this crucial decision
with the aid of your attorney, and with respect to all local ordinances.
Our hope is that this overview will put you in a better position to fully
understand the differences, and to make the conversation with your
attorney more useful (and shorter, since most will bill by the
hour…)SOLE PROPRIETORSHPJust what it sounds like – one
person running the whole show. That means one person receiving all
profits, and that same person liable for 100% of all debts, without
limitation. You call all the shots, pocket all the dough, and are on the
hook for everything. It is the easiest kind of business to start, and
you’ll have to deal with the least amount of red tape. Those are the
pros. The cons should be obvious: full responsibilty for all company
debts, lawsuits and damages. For example, when signing a lease you will
need to PERSONALLY guarantee the entire lease term. You ARE the company.
The company is you. You’re not an employee and you cannot receive wages
and then deduct them as a business expense. You personally file taxes;
the business does not; and you are taxed for all of the company’s
profits.PARTNERSHIPMoving one notch up in the direction of
complexity is the partnership, in which two or more individuals share
decision making, profits and liability. It is the simplest form of
organization involving more than one person. But be aware that each of
you will answer PERSONALLY for all of the company’s debts and
liabilities. Because two (or more) heads are typically better than one
– and always bigger than one – you will enjoy more start-up capital,
more resources, more expertise. Assuming, of course, that you get along
well together and won’t be fighting tooth-and-nail over every
decision.Many partnerships follow the simple two-person formula
of “idea guy†+ “money guyâ€. The “idea guy†in this casesi
knowledgeable about your particular line of business, and will typically
run day-to-day operations, while the “money guy― does just what
you’d expect.
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It’s fairly easy to begin a partnership – and although a written
agreement isn’t required, you definitely want to enter into a written
partnership agreement before moving forward. Things don’t have to be
equally split in a partnership – you (and your partners) make the
rules. So make sure your partnership agreement covers who’s
contributing what, how profits will be split, division of duties, and
plans for what happens in the event that a partner leaves, moves, or –
not fun, but you’ll need to address it – dies.LIMITED
PARTNERSHIPSlightly more complicated than a partnership, a limited
partnership features two different types of partners – one type that is
fully liable for the business’ debts, and another type that has no
liability for company debts. You must file a Certificate of Limited
Partnership with the appropriate state or county regulatory office to
operate. In most cases, if you’re looking for a reduction of your
personal liability, better options are the three listed
below.CORPORATIONIf the thought of “100% personal
liability― in the Sole Proprietorship gave you the willies, then you
definitely need to examine closely some of the benefits of incorporation.
A corporation is a separate legal entity from its owners and is taxed as
a corporation. This means your house, personal savings, car, and all
other personal assets (as long as they’re not used in your business)
are safe from creditors and collection agencies.But liability is
limited, not removed from you completely. You still have many personal
responsibilities, pursuant to corporation laws. For example, if you/your
company fails to comply with regulations, or engages in gross negligence
or even criminal acts, you can’t hide behind the company’s logo,
point your finger and say, “It was the company, not me!― You
personally can be held liable, both civilly and criminally, for such
gross misdeeds.Also, when you’re raising funds for your
business, typically at a bank, the banker is very aware of your physical
presence and will typically require you and the other officers of the
corporation to personallyguarantee any small business loans. So again,
you still do carry some liability with a corporation, just not to the
extent you would with a partnership or sole propreitorship.If the
company is making profits, how do you personally take profits? You’re
no longer the “owner,― remember, you’re a corporate officer, and
this means you’ll receive wages from your company. Can you just pay
yourself 100% of the profits as your wages? Probably not, because the IRS
sets a level of what it considers to be “reasonable wages― according
to each industry’s standards. But you will receive wages (within
reason), and you will personally pay taxes on them as you would any other
income; but, on the other hand, these wages can be deducted from the
corporation’s taxes as a valid business expense.LIMITED
LIABILITY COMPANYLLC’s are becoming more and more popular and with
good reason. Like a corporation, you’re not personally liable for the
company’s debts, damages and liabilities. But the main difference has
to do with tax law – and here’s where you really need a good attorney
and/or accountant to steer you through the particulars of your situation.
The prime benefit is reduced taxation – you get taxed for income as the
owner of the business, but you enjoy an exemption from corporate taxes
– so instead of being taxed twice, you’re only paying out once. You
will abide by Regulations that govern the internal affairs of your
company, something like a partnership agreement. In addition, to qualify
as an LLC, your business must have Articles of Organization. These
Articles, separate from the Regulations, are similar to corporate
articles of incorporation and must be filed with the appropriate state
regulatory authority.“S― CORPORATIONIf that combination
of reduced personal liability and reduced taxation sounds appealing to
you (and it should!), you should also consider a possible alternative for
your business: the subchapter “S― corporation. In a nutshell, it
provides most of the same protection of a corporation while at the same
time removing the onus of “double― taxation. Of course there are
several stipulations and rules that determine whether or not your
business will qualify – so be sure to discuss this option with your
attorney.