STRUCTURING YOUR BUSINESS
There are lots of ways to structure your business, each with its own advantages and disadvantages. Your decision about the correct path to take will depend on many factors including how big your business will grow, how you plan to raise capital and pay taxes, and liability concerns.
Basic business types include:
� Sole proprietor: This is the oldest and simplest form of business there is. A single person launches a business that may or may not have employees, a storefront, etc. The advantage of a sole proprietorship is simplicity. All business income and expenses are reported as schedules on your personal income tax. The drawback is that there is no separation between you and the business. If the business owes money or is found liable for any damages, you are personally responsible. It is entirely possible that a business mishap could ruin your personal finances.
� Partnership: Same as the sole proprietor except with two or more people. Here again, simplicity is the main advantage. Also, the liabilities are spread among all of the partners according to their share of the business. The bad news is that disagreements between the partners can wreak havoc on everyone.
� Corporation: Think of starting a corporation as giving birth to a separate entity that exists on paper. This entity has many of the same rights and responsibilities of a natural person. Because a corporation is its own entity, it pays its own taxes and handles its own liability, meaning that individual officers (executives) and shareholders (investors) are normally not liable for any expenses or damages. This protection is not absolute, however. For proof, one need look no further than the Enron trial. Liability and financial protection plus the ability to sell shares to investors are a corporations biggest advantages. The drawback is that the paperwork and other legal requirements can be quite complex. There are also tax ramifications. Corporations in the United States come in two flavors: S (typically for smaller companies) and C (typically for larger companies). Corporations have lives of their own, meaning that they continue after their founders leave or pass away.
� Limited Liability Company: What if you could have the simplicity of a sole proprietorship with the liability protection of a corporation? The Limited Liability Company (LLC) is a fairly recent phenomenon that has become increasingly popular because it offers the best of both worlds. Like a sole proprietorship, an LLC ceases to exist when the owner passes away or leaves the company.
� Limited Liability Partnership: An LLP is the same as the LLC except owned by two or more people. This is very similar to the partnership discussed above. The biggest drawback that I see with an LLP is that it ceases to exist when one or more partners leave or pass away.
How youll structure your business will be one of the single biggest decisions youll ever make and one that could have major, even dire, consequences. This article provides a brief overview of the different types of businesses and is meant to get you thinking about how youll structure your own business. Do your homework and learn all you can before even thinking about making up your mind.
There are many companies who will handle the paperwork of filing your corporation and/or LLC. These companies will tempt you with offers like Incorporate Today for only $99! Are these companies fast and easy? Certainly. So why spend $1,500 or more having an attorney walk you through the process? I asked an attorney that very question and got a very simple and compelling answer: security. On the off chance that your business gets into trouble, your attorney will stand behind her or his work and represent you in court. Strike off on your own and finding someone to help you in your hour of need will be more difficult. In my never-humble opinion, this one falls under the category of cheap insurance.
Marriage, buying a house, and launching a business are some of the biggest decisions youll ever make in your life. I cant help you with the first two, but I can advise you to take your time, think things through, and always remember that the key question is not whether you can but whether you should.
This is my seventh article in this series on starting or reinventing a business and we still havent talked about your business plan. No, I havent forgotten. Meanwhile, well talk about professional help and when to get it in my next article.