Business Formation

What type of company should I form–a sole proprietorship, corporation, limited liability company (LLC) or a partnership?

There are many things to think about when deciding how to form your company. We’ll discuss the different structures of the business forms and work closely with you to help you choose the business structure which best meets the needs of your business. Things that you will need to consider in deciding which form of business is right for you include tax implications, how much personal exposure or liability you will have and who will retain ownership of equipment, proprietary business information and intellectual property.

My partner and I want to start a company together. Do we need to see an attorney?

Yes. No matter how strong of a friendship or working relationship you have, differences of opinion will eventually surface and you need to be prepared, as co-owners of the business, to deal with that eventuality. There are a number of issues that must be addressed when starting a new company, and foremost among them is how business decisions will be made when there is disagreement among the managing members of the business. Regardless of the form of your business, you need a well written agreement describing the roles and responsibilities of the owners, voting procedures, and the procedures for buying and selling of the owners’ interests or shares in the business. In addition, you should have well written but not overly restrictive non-compete agreements, non-disclosure agreements and confidentiality agreements with each of the owners and key employees of the business. At a minimum, you should have an initial conference with an attorney to discuss these matters.

If my business fails, will I lose my house?

Your business should be set up to minimize personal and business liability. You are at most risk of losing your house if you have a sole proprietorship or partnership as you are liable for all business debts. A properly set up corporation, limited liability company or limited partnership will protect your assets provided that you clearly keep your business operations separate from your personal matters. In this regard it is advisable that you keep your accounting and other business records both accurate and completely up to date.

How is an S Corporation different from a C Corporation?

If you decide that a corporation is the right business form for your business, you will need to decide whether to elect S Corporation status. S Corporations, so named for the Internal Revenue Service tax code chapter under which they are authorized, differ from regular C Corporations primarily in the way the business and business shareholders are taxed. C Corporations and their shareholders face what is commonly referred to as “double taxation,” where the business is taxed on the income to the business and the owners or shareholders are taxed on their salaries and any dividends or distributions they receive.

An S Corporation is not subject to “double taxation” concerns as it is treated as a partnership for tax purposes. That means that there is no business tax and the corporate earnings are shared according to ownership interests for tax purposes. In effect, with an S Corporation you get the personal liability protection of a C corporation with the tax liability of a sole proprietorship or partnership.

Every type of business form has both advantages and disadvantages and you should consult with an attorney to ensure that the choice of business form you make is the right one for you.