The Right Structure
It's not the sexiest part of starting a company. But, deciding on the right business structure for your new operation may be one of the most important decisions you make early on. That's because the type of structure you choose will determine everything from whether creditors can go after your personal assets if, say, the company defaults on a loan, to the taxes you'll pay.
“There's no question: You want to get the right structure—and get it right the first time,” says Chester Hosch, a partner with the law firm of Schreeder, Wheeler & Flint in Atlanta.
Your best bet: understanding the pros and cons of each of the four major options.
Choice # 1: Sole Proprietorships
With little paperwork needed to establish this type of structure, it's by far the easiest to establish. But there are big downsides: Your personal assets could be on the line in case you're sued or land in financial trouble. What's more, you can't legally protect your company name, so anyone out there could set up a business using the same moniker.
Choice #2: Partnerships
You have two ways to go. If you form a general partnership, all partners will be able to participate in most management decisions. But everyone will be liable for each others' actions.
There's also a limited partnership, with which you're responsible only for your own missteps. (The general partner, however, is on the line for everyone's liabilities). You just have to agree to give up the right to take part in day-to-day management decisions.
Choice #3: Limited Liability Companies
There are lots of benefits to being an LLC. You're protected from the liabilities of your partners. You can also change the way profits are allocated every year. And, the paperwork is fairly simple. But, it's difficult to take an LLC public.
Choice #4: Corporations
One possibility is to incorporate as a C corporation. Under this structure, the company is considered to be a separate legal entity from the owners, so you won't be responsible for company liabilities or losses. Plus, virtually all public companies are C corporations.
On the other hand, there's a double taxation: Taxes have to be paid on corporate profits, as well as on dividends to shareholders. You'll also have to hold annual stockholders meetings and keep careful records.
The other tack is to become an S corporation. In that case, income passes directly to shareholders, who report earnings on their own tax forms. Result: no double taxation. And, creditors still can't go after your personal assets.
But, to go public, you'll probably have to convert to a C corporation. Plus, S corporations are a lot less flexible than the LLC when it comes to profit sharing among owners: Profits have to be divided strictly according to the percentage of stock ownership. “It's pretty much carved in stone,” says Hosch.
How to Go About It
No matter what type of structure you choose, it's best to hire a lawyer to help you out. Ask other small business owners for suggestions. What about cost? Expect to pay $500 to $1,000 in legal and other fees to get it all set up.
For further reading/reference:
Quotes:
Chet Hosch, Sept. 12, 2007
About the Author: Anne Field is an award-winning small-business writer based in Pelham, NY
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