Top 3 Business Formation Options
Giving Your Start-Up a Head Start
It’s time to commit to that great business idea you’ve been fantasizing about. This is a brave and bold move. Although you will face many challenges, watching your company grow and succeed will be extremely rewarding.
By now, you’ve Googled how to start a business, done your research, hopefully started a business plan and financial plan. Now you’ll need to determine your business structure. This is a very important step in the process and can be a bit confusing. It is always wise to reach out to a knowledgeable business attorney who can help you select the business structure that best meets your unique needs.
There are several business structure options to choose from. This decision will significantly impact your business profit, liability and taxes. You can always reevaluate and change your business structure as your business grows and needs change. Getting the assistance of an attorney, capable of navigating the nuances of business formation will ensure that your amazing business idea is set-up for success from day one.
To get started deciding which business structure best fits your needs and goals, here are the 3 Top Business Formation Options.
- Limited Liability Company (LLC):
- Owners of an LLC are called members rather than partners or shareholders. You can form an LLC with only one member, like a sole proprietor (without the personal Liability), or with multiple members.
- This type of business formation carries with it similar benefits of both a Corporation and a Limited Liability Partnership (LLP), without some of the burdens those business structures may involve.
- Similar to a corporation, an LLC is a separate entity from the owner, providing legal and financial protection. This protection allows an owner to avoid taking on the personal responsibilities for any debt or liabilities of their business.
- Most small business start-ups will open as an LLC rather than a corporation. Forming an LLC is generally less expensive to start, has less formalities and you don’t have to pay corporate taxes on top of individual taxes. Limited Liability Companies share the same tax benefits as an LLP, where each member is taxed based on the owner’s individual income.
- A Corporation is a company or group of people that are authorized to act as a single entity. This option is preferred by companies who are looking for outside investors or who want to take their company public.
- Forming a corporation is essentially creating a person (legally a person). It is not a human being of course, but it is a single entity, that has a lot of the same rights and obligations of a person. This ‘person’ has a name, must pay taxes, debts and is liable for any wrongdoings.
- Some believe that a corporation is the most advantageous business structure. A corporation is made up of individual directors (board of directors), officers and its members, called shareholders, which own a percentage of the business or stocks. This single entity is separate from the owners, providing legal and financial protection to its members, similar to an LLC.
- Limited Liability Partnership (LLP)
- The main advantage of an LLP is that all partners are protected by some form of liability protection. An LLP is basically a general partnership, but it gives the partners some limited personal liability. In this jointly-owned business, two or more people agree to share in all assets, profits and financial and legal liabilities.
- It is similar to an LLC in many aspects, including how individual owners are taxed. The structure does differ in that an LLP must have a managing partner that is liable for the actions of the partnership.
- It is important to be aware that some states recognize LLPs formed in other states (called foreign LLPs), and some states do not. This could affect the limitation of liability in the other states, possibly treating your business as a General Partnership. With a General Partnership, owners are left unprotected. They are personally responsible for business liabilities and debts. This means that their personal assets can be seized and partners may be sued for business debts.
- The degree of liability limitation for an LLP varies from state to state. It is crucial to do your research and/or reach out to a qualified attorney.
Yes, these options can be confusing and there is so much more to consider when starting a business. Will you have members, partners or shareholders? How will you divide the company? Should you have a Start-up Equity Agreement and Co-founder Equity Agreements? Fortunately there is help.
Attorney, Matthew Rossetti, specializes in start-up businesses and the formation of companies. He is the premier “Slicing Pie” expert in the midwest. Rossetti uses a custom dynamic business formation model to create a perfectly fair equity split, in the early stages of a company. Set up a 30 minute consultation for guidance.