What kind of new business do you plan to start? Sure, you know what your business will do, but for legal reasons, you also need to figure out how to structure your company. It's a pretty important consideration, because you'll be thinking about how much liability protection you need, as well as how much paperwork you'll have to do.
Below you'll find information about defining your company as a sole proprietorship, partnership, limited liability company (LLC), or corporation.
How to keep the structure simple
For many new businesses, the best initial ownership structure is often either a sole proprietorship or a partnership. A sole proprietorship is a one-person company. Usually you don't have to do anything special or file papers to set one up. If you own the business with someone else, then a partnership may be the answer. This simple arrangement usually doesn't require filing paperwork, either. The arrangement begins as soon as you start a business with another person.
As far as the law goes, sole proprietorships and partnerships are one and the same as the people who own these businesses. As the owner of one of these companies, you report business income and losses on your personal tax returns, and are personally liable for any business-related obligations, such as debts or court judgments.
Potentially limiting Limited Partnerships
You may have heard of limited partnerships, which are a little more complicated. Limited partnerships are typically created by one person, called the general partner, who arranges investments from other people, called limited partners. These relationships between the general partner and the limited partners can be very complex.
Incorporation makes sense for many entrepreneurs because it protects you, the business owner, from having your personal assets - such as your home, personal bank accounts, and vehicles - put at risk if something turns sour. In legalese, this concept is known as "limited liability."
Typically, there are three options available:
- C-corporation: You can think of a C-corporation (the technical name for a regular corporation) as having just about the same legal and tax status as a person. Owners don't use their personal income tax returns to pay tax on corporate profits. The corporation itself shells out the cash to the government, often at a lower rate than what the owners of other kinds of businesses pay. Setting up and running a corporation, however, means a fair amount of paperwork and formality, such as completing forms covering officers of the company and recording minutes of regularly scheduled meetings.
- LLC (limited liability company): Like corporations, LLCs provide limited personal liability for business debts and claims, which can be a real help for a new business. But when it comes to taxes, LLCs are more like partnerships, because owners report business income on their personal tax returns. This arrangement doesn't require as much formal structure as a regular corporation, which is one reason why it can be a good choice for a new business.
- S-corporation: Like an LLC, an S-corporation provides all the limited liability of a regular corporation, while the owners are also taxed for business income. But unlike an LLC, S-corporations must first be regular corporations before applying for this unique tax-paying status - and continue following all other corporate regulations. All of this translates into a business structure that requires careful consideration and even expert advice before starting.
Making your business structure official
If you start your business as a corporation, LLC, or limited partnership, you'll need to file organizational documents such as articles of incorporation with the right office in your state. Depending on the state in which you form your business, this will run you anywhere from about $80 to $800. Many states have forms and sample documents online. The actual filing is usually done through your state's department of corporations or secretary of state's office.
There's nothing phony about a fictitious business name
You may not have to do any filing if you're planning to start a sole proprietorship or a partnership. But even if this is your plan, you should investigate whether you need to apply for a fictitious business name. This fishy-sounding term is also known as a DBA, which is short for "doing business as," and is simply the operating name of your business. If your business name is not the same as your own personal name, you will need to file a fictitious business name.
The reason for a DBA, as far as the government is concerned, is to keep track of companies in the event of a complaint or legal problem. The registration process is very straightforward and is usually handled by the county clerk in the county where you plan to start your business. Once this is taken care of, you can do things under your business name, like open a business checking account.