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