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To start a business, all you need to do is hang up
a shingle. You can operate by yourself as a sole proprietor,
with others as a partnership, or in a formal entity
such as a corporation or Limited Liability Company (LLC).
As a sole proprietor, there are few legal formalities
- if operating under an assumed name, you may need to
register (usually at the county level.)
NOTE: See Characteristics
of Business Entities for a chart comparing different
types of business forms.
Partnerships are also easy to create. You need to draft
a partnership agreement which is the agreement (basically
your own private law) which governs the relationship
between the parties - who gets what percentage, who
makes the decisions, etc. Again, there are few legal
formalities. General partnerships usually do not need
to register anywhere except maybe at the county level.
Limited partnerships are more like corporations and
usually require registration at the state level and
the services of a registered agent. Click here to find
out more about the role of an RA.
OK, so corporations and LLCs require more work and
are a little more expensive - why should I bother?
Personal liability! When a corporation enters into
a transaction, it is the corporation and not the shareholders
who is responsible. When starting up, a bank may require
a personal guaranty since your company doesn't yet have
a credit history but, as a rule, a shareholder's liability
is limited to the amount invested into the company.
Creditors cannot reach beyond the assets of the company
in normal circumstances. The same is true with lawsuits.
It is the corporation not you who will be sued (assuming
the lack of unusual circumstances such as fraudulent
undercapitalization.)
Tax Considerations! It's true that the potential exists
for double taxation (see What is "pass-through
taxation?) However, you can avoid this with the use
of a LLC or by electing to be treated as an S Corporation.
With the corporate form of ownership, you can usually
elect to implement various tax-free benefits such as
life and health insurace and retirement plans
Transfering ownership and raising capital are usually
easier through the use of stock. Corporations usually
have a perpetual life as well, distinct from that of
the shareholders.
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