Organize the Business Structure That Is Right for Your Opportunity
Every business requires a structure that will withstand necessary legal and governmental scrutiny. The choice of how to organize a new enterprise should be made based on the needs and capacity of the owner(s) to maintain and detail the records, history and finances of the business.
Many simple service businesses are set up as a sole proprietorship. The lawn service I utilize is a sole proprietorship. I make out the check in the name of the person providing the service. If I do not spend over $600 per year with any sole proprietor I am not required to fill out tax form 1099 and provide the information to the Internal Revenue Service and the service provider.
The sole proprietorship is the method of structuring most entrepreneurs utilize when starting out in a small-scale commercial venture. This works if services provided are simple, of relatively small transaction size, small inventory required and there is no need for hiring and paying employees. As sales grow and the need to expand becomes apparent the entrepreneur will probably want to consider a more formidable structure.
Here is my advice when considering the business structure best suited for your business, based on present and future needs: consult an attorney. Taxes, investment vehicles, partnering, harvesting profits, incorporation options, and depreciation or only a few of the areas of concern a new business may need to consider and decide upon. A business attorney will have expertise in every area of concern and can construct the most appropriate structure for your business and personal needs. The ability to memorialize in precise legal documents the exact terms, conditions, and responsibilities of all officers and/or share holders in the company is invaluable when disagreements occur.
The importance of written agreements and contracts, signed by all parties to the transaction, cannot be overstated. No one ever enters into a business situation if they are 100% sure it will fail. There is always an air of confident expectation that the business has a good chance of success and will ultimately prosper. Unfortunately, there is always a significant chance that results will be disappointing and disagreements will occur. Make sure that all parties to a deal have a full awareness of the business structure they are participating in.
Oral contracts and agreements have been upheld in courts. However, they are much more difficult to enforce than properly written and executed business contracts. Do not leave important details to chance. Have proper documentation on hand for the protection of all parties.
Partnerships, limited partnerships, limited liability corporations, and corporations are popular vehicles for housing the legal structure of a business. Each has benefits and liabilities, depending on the needs and requirements of the business owner(s).
A partnership can be useful when several parties bring complimentary assets to a venture. One partner might have a patent that represents a commercial opportunity. Another might have investment resources they can bring to bear. Yet another potential partner has specific management experience to contribute.
I have entered into several partnerships in the past with mixed results. If there is a bit of advice I can offer to potential partners before they start it is this: have full agreement on how to harvest profit/loss when success/failure occurs. One partner wants to grow and mature a business, while another wishes to cash out after a few years and this is where the seeds of destruction are sown. Goals, as well as duties and responsibilities must be fully transparent.
The Limited Partnership can be an excellent opportunity for the entrepreneur wishing to put capital to work, but not physically committing to work on a project. Typically a General Partner will manage the business, and the Limited Partners provide the pool of money required in funding a business. Usually units of a Limited Partnership are sold in equal dollar amounts. Be sure and read the deal prospectus carefully and skeptically. In addition, be sure to familiarize yourself with the laws of the state where the business entity will be domiciled as the various states have different laws in this area.
A Limited Liability Corporation is a relatively new corporate structure that offers many of the advantages of the corporation and the benefits of individual tax rates. An attorney will be able to advise if the Limited Liability Corporation is appropriate for your particular needs.
A Corporation is the vehicle that requires the most care and maintenance, as well as providing maximum personal protection. A Corporation is ostensibly a legal entity that acts as if it were a person. Losses are incurred by the legal entity of the Corporation, not by the shareholders of the Corporation. Assets of an incorporated business are property of the Corporation, not the individual shareholders. The owners of stock in the Corporation enjoy benefits based on the number and class status of their shares.
An attorney can advise the best state in which to incorporate based on your anticipated needs. Nevada is the best state for secrecy. Delaware is excellent for transparency and resolution of disputes. Some states are more business friendly from a tax and regulation standpoint and all of these areas must be considered before filing for incorporation.
A Corporation will need to be assigned a Federal Identification Number in order to open a bank account at any financial institution in the United States. The Federal Government utilizes this number when tracking tax, financial and employment data on every incorporated business.
The Articles of Incorporation, annual meeting minutes, a board of directors, corporate fees and filings, state compliance and filing local, state and federal tax returns require a detailed, and potentially costly execution of corporate governance. In addition, stock certificates must be appropriately accounted for and capitalization requirements met and maintained.
Be realistic when choosing the business structure that will offer your fledgling enterprise the most useful features based on present and future needs. Many people file for incorporation, then realize they do not need the hassle of maintaining detailed books and records. Use the business structure that enables you to legally perform every obligation required, while allowing you to be a slave to your business opportunity, not a slave to your corporate structure.
