Setting Up Your Business Correctly

Setting up your new or existing business is Very important...  Most people think that setting up a business is as simple as going down to the local state or county registry and applying for a business license... Well it could be that simple but have you forgotten the other things such as: Liability protection against lawsuits? Proper business entity structure? Tax liabilities? etc...

All of those questions can have dramatic and important impact on your business and your life whether you know the answers or not... Setting up your business correctly from the start will save you months and or years of headaches in the future... It will save you time and money on taxes, liabilities, and provide you benefits that can be gained by structurally setting up your new business correctly.


The four most common business structures are as follows:

Sole Proprietorship.  A sole proprietorship is the simplest and most common form of a business.  A sole proprietorship is defined as a business that is owned by one individual.  The owner is personally responsible for all debts of the business.  Profits are considered as personal income and taxed accordingly.  If the business is going to be a sole proprietorship operating under a name other than the owner’s name, the business must register the business name (commonly known as “doing business as” or “DBA”) with the  State’s Trademark and Trade Name registration office.

 General and Limited Partnership.  A partnership is a voluntary association of two or more persons as co-owners to carry on a business for profit.  Partners need not be natural persons.  Partners share in the profits and share control of the administration or management.  A partner shares losses according to his share in the profits.  A partnership may be limited to a definite term by the partnership agreement.  Unless otherwise provided in the certificate, all property originally brought into the partnership or subsequently acquired on account of the partnership is partnership property.

One of the main advantages of operating as a partnership is that the owners can deduct early losses of the business from other personal income.  Some drawbacks of operating as a partnership are that the owners are personally liable for all debts and judgment against the business, each member can bind the other so as to render him liable, all profits are taxable directly to the owners at rates which are generally higher than corporate rates, and partners do not usually have the tax benefits of tax deductible plans such as pension plans which can be available to a corporation.

Limited partnership is a partnership which, in addition to its general partners, has one or more limited partners who are not bound by the obligations of the partnership.  A limited partner, however, may not take part in the control of the business or will be held as a general partner.  A limited partner’s surname cannot be part of the partnership’s name.  The general partner has the same rights and liabilities of a partner in a regular partnership.  There are certain acts, however, which must be consented to by the limited partners

Corporation. A corporation is a legal entity created through the state.   A corporation is owned by its shareholders, although the shareholders do not directly manage the corporation.  They elect (and can remove) the board of directors.  The board of directors is responsible for managing the affairs of the corporation, and the directors normally make the major business decisions and supervise and appoint the officers, who make the day-to-day decisions of the corporation and are responsible for everyday management of the business.  

 The law treats a corporation as a legal “person” that has standing to sue and be sued, distinct from its stockholders.  The legal independence of a corporation prevents shareholders from being personally liable for corporate debts.  The legal “person” status of corporations gives the business perpetual life; deaths of officials or stockholders do not alter the corporation’s structure.   Corporations are taxable entities that fall under a different scheme from individuals.  States also have registration laws requiring corporations that incorporate in other states to request permission to do in-state business. 
 

 For small, privately held corporations, it should be stressed that shareholders can be shielded from corporate liabilities only if the business is conducted in the proper corporate form and corporate records are kept.  What that means is that even if there are only a handful of shareholders, meetings must be held and minutes properly prepared.

Limited Liability Company.   A limited liability company, like a corporation, is a legal entity existing separately from its owners.  A limited liability company is not a partnership or a corporation, but is combines the corporate advantages of limited liability with the partnership advantage of pass-through taxation.  A limited liability company is owned by its members, who may directly manage the limited liability company (member-managed), or who may appoint managers to directly manage the limited liability company for them (manager-managed).  The members may also apportion duties amongst themselves as they see fit, and may even appoint one of their members as president, or vice president, or secretary, or treasurer, with the appointed member to have the duties normally associated with such title or titles.  The primary advantage of a limited liability company is limiting the liability of its members.  The members are not liable for the debts and obligations of the limited liability company.  Additionally, the earnings of a limited liability company are treated like the earnings from partnerships, sole proprietorships and S corporations, and the members have greater flexibility in structuring the limited liability company than is ordinarily the case with a corporation, including the ability to divide ownership and voting rights in unconventional ways while still enjoying the benefits of pass-through taxation.  

Once you have determined the best legal structure of your business, the next step is to complete the necessary documents to legally register your business. Give us a call at 602-464-4034 and let our legal staff help you protect your business from any liability.

 *Certified Legal Document Preparers are great for helping you prepare the necessary documents to organize your new business at a greatly reduced rate.  They provide typing of documents by individuals experienced in a specific area of law. Be sure the Certified Legal Document Preparer you choose has been properly trained, is familiar with current laws affecting the organization of your new business, and is certified.