Factors to Consider When Setting Up a New Enterprise
One of the important considerations when starting a new business venture is the selection of legal form. Should you set up as a sole proprietorship, partnership, corporation, or limited liability company (LLC)? Here are some factors that should inform your decision.
How Do You Envision Ownership and Management of the Business?
Are you planning to run the enterprise yourself or with a few selected associates? If so, you can create a sole proprietorship, partnership, LLC, or corporation. If you anticipate multiple owners, you won’t be able to run the business as a sole proprietorship. Furthermore, if you need a large number of owners to finance the startup and operation of the business, a partnership may not be your best alternative. Although sole proprietorships and partnerships give you greater control and flexibility, the tradeoff is that you’ll be exposed to personal liability for the debts and obligations of the business.
How Will You Pay Startup Costs?
If you need other investors to get the business going, you can set up a partnership, LLC, or corporation. With a corporation, you can sell shares to investors, either in private transactions or through a public offering.
What Potential Liability Does the Company Have?
With a sole proprietorship or a partnership, you won’t be able to protect your personal net worth from creditors of the company. With a corporation or LLC, your exposure is limited to your investment in the company—you can lose the value of your stock or your investment in an LLC, but your personal assets are typically not at risk.
The Tax Consequences
The income from a sole proprietorship, partnership, or LLC passes through the business and taxed only as personal income. With some exceptions, the income of a corporation is taxable at the corporate level but otherwise subject to income tax only if paid out to shareholders as dividends.
Ease of Setting Up and Complying with Legal Requirements
With a sole proprietorship or partnership, there’s no legal document to file with the state to create the legal entity, and there are typically no annual meetings or filing requirements. You may need a business license, and you may choose to prepare and enter into a partnership agreement.
With an LLC, you must file articles of organization with the state, but you won’t have to prepare share certificates or maintain share records. To create a corporation, you must file articles of incorporation, prepare bylaws, and issue stock certificates. Corporations are also required to maintain certain records and hold certain periodic meetings of shareholders and boards.
Contact Attorney Howard N. Sobel
At the office of Howard N. Sobel, we provide comprehensive counsel to businesses and business owners. Contact our office online or call us at 856-424-6400 to set up a free initial consultation (on selected cases). We are currently available by phone, text message, and videoconference only. Evening and weekend appointments can be arranged upon request. We accept all major credit cards.
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