When it comes to the nuts and bolts of launching your new business, there are three primary considerations:
- Choosing a legal business structure
- Understanding government rules and regulations affecting your business
- Buying business insurance
CHOOSING A LEGAL BUSINESS STRUCTURE You have several options for the legal structure of your business. A written agreement reviewed by an attorney is essential. Here’s an overview:
● sole proprietorship: In this form of doing business, one person (you) owns and operates the business. On the plus side, your business earnings are taxed just once, and you alone are in charge of all business decisions. On the downside, sole proprietors are personally liable for any claims against their businesses, and often have more trouble getting financing. Many businesses start out as sole proprietorships, then switch to more complex structures.
● partnership: In a general partnership, both partners manage the business and are responsible for its debts. In a limited partnership, certain (limited) partners are investors but do not manage the business. One advantage of partnerships: The partnership doesn’t pay tax; partners report profits or losses on their personal tax returns. The disadvantage: Partners are personally liable for any debts of the business.
● “C” corporation (conventional): Incorporating protects you from liability for the company’s debts or claims against it. A corporation can sell stock, enabling you to raise money. However, corporations are strictly regulated and are taxed twice— the corporation pays income tax, and shareholders pay taxes on any dividends.
● “S” corporation (subchapter): An S corporation protects owners against liability and provides more tax benefits than a corporation. The corporation doesn’t pay federal income taxes; profits and losses are reported on shareholders’ individual tax returns. But complying with regulations can be costly and time-consuming, and you’re limited to a set amount of shareholders, which may be restrictive if you’re seeking to raise lots of capital.
● limited liability company (LLC): An LLC offers liability protection like a corporation, but without double taxation because earnings and losses are reported on the owners’ personal taxes. There is no limit on the number of members. Owners or members in a multiple-member LLC should have a written membership agreement reviewed by an attorney.
