Did you know that small businesses employ over one-half of all private sector employees in the United States? According to the most recent information I could find through the U.S. Department of Commerce, there are approximately 27.5 million small businesses in the U.S. I have heard it said that small businesses are the fuel that drive the U.S. economy.
Many people come into my office looking to start up a new business. One of the first questions that needs to be asked is how should my business be organized or structured. There are no cookie cutter answers to this question. The purpose of this article will be to look at the different types of business structures available when starting a new business. Some of the options include the following:
1. Sole Proprietorship. If a sole owner of a business wants to conduct his or her business for profit under his or her name than they are operating as a sole proprietorship. The sole owner assumes complete responsibility for all of the liabilities and debts of his or her business. Generally, there are no formal business filings with the State or Federal Government needed to operate as a Sole Proprietorship.
2. General Partnership. When two or more individuals act as co-owners of a for profit business then they are operating the business as a general partnership. All partners are responsible for the liabilities and debts of the general partnership. Although a written partnership is not required, having a written partnership agreement is a good idea to avoid misunderstandings or future problems.
3. Corporation. A corporation is a legal entity which is created by filing Articles of Incorporation with the office of the Indiana Secretary of State. The corporation is owned by its shareholders and a shareholder enjoys protection from debts and liabilities incurred solely by the corporation. You need to make sure that you maintain a “wall” between your corporation activities and assets and your personal activities and assets. A potential drawback to operating as a corporation is that income is generally taxed twice with a corporation. Once at the corporate level and a second time at the employee level when a wage is paid or a shareholder is given a dividend. If you meet certain criteria set out by the Internal Revenue Service (IRS), a corporation may elect to be treated as a “S Corporation” for Federal income tax purposes which will allow for taxation only once.
4. Limited Liability Company (LLC). This is a legal entity which is created by filing Articles of Organization with the office of the Indiana Secretary of State. This formal association combines the advantage of a corporation’s limited liability and the flexibility and single taxation of a general partnership. An LLC has members rather than shareholders. An LLC should operate under a written operating agreement which is akin to a partnership agreement or bylaws of a corporation.
5. Limited Liability Partnership. A general partnership can elect to operate as a Limited Liability Partnership (LLP). To operate as an LLP, registration must be filed with the office of the Indiana Secretary of State. Partners in an LLP enjoy protection from many of the partnership’s debts and liabilities.
There are many other considerations and factors to look at when you are starting a new business. You need to seek qualified legal and tax advice in starting your new venture in the business world. Once you get your business up and running, then you need to maintain your business form so you don’t lose the advantages of the particular business organization you have chosen. Seeking legal counsel helps to protect your business investment.