How Do I Form a Business?
When creating a business, there are many factors to consider. It is important to examine all of these, including all financial aspects, staffing details, location, and, of course, the legal ramifications. At Stevenson Smith Hood Knudson, P.C., our goal during your business formation is to ensure you have all the information you need for the process to be successful.
The specific requirements of forming a business vary according to the state in which the business is created, though there is a great deal of commonality with some types of entities. There are also federal legal considerations when forming a business, such as tax and employment laws. Stevenson Smith Hood Knudson, P.C. can help you form a business, as well as assist with the legal issues that arise along the way after the business is formed. Contact us today to get started.
Choosing the Right Business Entity
You understand the purpose of your new business better than anyone, and we understand the legal issues related to it. Seeking legal advice during the business formation process will help you identify and address crucial issues of which you may not even be aware. Here are a few common issues:
- Who has and potentially could have ownership in the business
- What type of business entity to use, and why
- How capital can legally be raised
- The legal relationships between the co-owners
- How taxes are paid
- Who has legal and financial liability for the actions and debts of the business
These are only a few examples of issues. Do not leave these matters to chance. We can help you protect yourself. One of the first questions a new business owner faces is which type of business entity to use. Here are some of the most common examples.
Sole Proprietorship
In a sole proprietorship, all of the assets of a business are owned by one person in his or her own name. That person has complete control over operations and profits, and all of the liabilities of that business fall on that person as well. A sole proprietorship is not legally a separate entity from the proprietor, so any legal or financial concerns are inextricably bound to that individual. It consequently offers the least amount of protection, and is rarely—if ever—the preferred option.
Partnerships
Partnerships are essentially alliances between two or more individuals in the way they operate. They can be established as either general or limited. As in a sole proprietorship, there is no protection against individual liability. Each partner has joint responsibility for ownership, profits, management, and financial and legal liability. In a limited partnership, the agreed-upon general partners have management control of the business while limited partners do not. They serve strictly as investors. Partnerships are an antiquated model of doing business, much like sole proprietorships.
Corporations
Corporations mark the shift to being legal entities separate from their owners. The term “corporation” derives from the root word “corporeal”, which denotes something or someone which has a body. A corporation is essentially an artificial person which is recognized by the law for the purpose of doing business. Forming a corporation allows all liabilities related to the business to be limited to the company’s assets. This protects—in most cases—the personal assets of the corporation’s owners. The chief distinction between the two primary types—S and C—pertain to matters of taxation and ownership. Most small business owners will be best served by an “S” corp., but it is important to talk to your tax professional about this..
Limited Liability Company (LLC)
Limited liability companies (LLCs) are not corporate entities in the strict sense of the term, however they operate as hybrid legal structures with the characteristics of both partnerships and corporations. Like a partnership, owners of a limited liability company actively participate in its management. However, unlike a partnership and more akin to a corporation, owners of an LLC are protected against personal liability for the organization’s debts and obligations. An LLC therefore offers corporate-like protection with non-corporate tax structuring and ownership. LLCs have become a very popular and practical entity, especially for small businesses.
Nonprofit
Those wishing to form a nonprofit organization should understand that there are many ways to structure them. The objective of such an organization is to serve the public interest, and in turn ownership rests with the community. Incorporation papers with the state at the time of business formation provide federal and state tax exemption. Owing in large part to their tax-exempt status, nonprofits are highly regulated, and anyone involved with the formation or management of such an entity should seek legal counsel from a qualified attorney.
