Business Formations – General Principles
Every sound business plan requires some thinking and it is always advisable to think over which kind of company you wish to operate. The entity which is going to be carrying out your plans has a lot of influence on your idea and hence should always be thought through. One wrong step and your business might fall or otherwise be exposed to unnecessary risks. Indeed, forming the right kind of company can reduce the risks and optimize your legitimacy in the business world.
Disadvantages of Sole Proprietorships
Sole proprietorships may sometimes cause more harm as they hold the proprietor fully responsible and liable for any decision in the business. This means that in case of certain tax liabilities and defaulted claims, the personal wealth of the proprietor is also at risk. Lenders are highly hesitant about providing business loans to Sole proprietorships and hence it is advisable to form a company to diversify risk and protect personal wealth.
Some of the various companies which can be formed are
Incorporations (The C – Corp): is one of the most common forms of business entities and is generally the preferred choice for international companies because of a number of benefits. Incorporations or corporations are recognized as legally separate individuals from their owners and hence they are solely liable for taxation and debt claims, while the owner has no liability beyond what is owned by the company. The ownership of such entities is easily transferable through stock sales and hence can also easily raise money. Such C Corporations can be privately owned, such as Publix, or publicly owned such as Wal-Mart.
Partnership: a business partnership occurs when two or more parties collaborate to form a business entity. The proportion of share they hold is the amount f claim they have over the enterprise and is also the percentage of total liability they can be held accountable for. In such a case the profit and loss of the business forms a part of the income statements of the partners and hence the partners are taxable instead of the company itself.
S Corporations: are domestic corporations which should not have more than 50 shareholders. S Corporations have the same protection as C Corporations and is usally the preferred form of incorporating a small company as there as many added tax benefits. In this form of a company profits and losses are passed to the shareholders and hence tax claims and levies are also charged against them.
LLC – Limited Liability Company: contains attributes of sole proprietorship/ partnership and corporations. As the name suggests LLc’s provide limited liability to the owner (s) and some amount of protection against hungry investors, but because of this protection it is more difficult to raise funding. LLc’s provide a great deal of flexibility for taxation purposes. Tax claims are to be filed by the proprietor or by partners according to their equivalent share, but can also be filed under the S corporation and other taxation systems.
DBA’s – Doing Business As: is a legal arrangement where a business entity (generally a sole proprietorship or llc) may perform business operations under a different name without having to create another entity. This is beneficial as you don’t have to create new enterprises for different lines of business and can represent them using different names or brands. Dba’s should be registered with the State Division of Corporations and provides limited protection as to the name. (However, to adequately protect a name, a trademark or sign mark should be registered). You should also be mindful that a dba, generally, does not provide the same type of liability protections.
It is very important to choose the right type of company as this can give a good boost to your business and also grant a level of security for the owners personal well being. An attorney located where you are going to operate your business is advisable. A simple one hour consult with an experienced lawyer who will charge between $250 – $300 can save you a lot of money and avoid many issues in the future.