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Business Formation

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For many first time entrepreneurs and startups, legally setting up a business is an after thought. But, as soon as you start thinking about outside investment or hiring employees, setting up your business properly becomes a front-and-center issue.

If you already know what business formation documents you need, the business attorneys at Calkins Law Firm can write those up for you. We’re not out to bill you as much as we can, we just want to get the job done.

Maybe you just have a few questions along the lines of, “What happens if…” Our attorneys have years of experience helping business owners set up businesses. We know what pitfalls to avoid and can point out potential issues that should be on your radar.

Types of Business Entities

The type of business entity you choose when forming a business has profound implications in both the short and long term. The right business structure limits individual liability, takes into account tax implications, and still leaves flexibility for future business growth needs. There are four main types of business entities.

Sole Proprietorship

As the name implies, a sole proprietorship is a business with one owner. It is the simplest type of business entity and the requirements for setting up a sole proprietorship are minimal. Unlike other business entities, income is taxed only once. An issue to be aware of when choosing this type of business entity is that the owner is the business and vice versa. This means that if someone sues the business, they can go after the owner’s personal assets in a lawsuit.

Partnership

This type of business structure is used when two or more people want to start a business together. If you choose this type of business structure, keep in mind that general partners are 100% liable for the actions of each partner. If liability is a potential issue, it’s probably better to choose a limited partnership (LP), which has at least one general partner and at least one limited partner who can invest without liability.

Very few partnerships stay a partnership forever. Partnerships dissolve for a variety of reasons including personality conflicts, vision for the business, and life events such as divorce or retirement. While you can buy a template for a partnership agreement online, it’s not going to help you when it comes time to resolve important issues like, “Who owns what?” When drafting a partnership agreement, be sure to hire an experienced business attorney who can help you sort through potential issues.

Corporation

While corporations are the most flexible type of business structure, they are more complex than other types of business entities. In a corporation, shareholders elect a board of directors who are responsible for running the company. Choosing incorporation as a business structure is most common among publicly traded companies. However, a modified version called a “close corporation” that has a simplified governance structure and fewer formalities can be a good choice for family-owned or other small businesses.

Corporation shareholders have limited liability because the corporation is a separate legal entity. However, corporations undergo more scrutiny than other types of businesses because the government requires them to appoint a board of directors, hold regular meetings and publish minutes from those meetings. Additionally, corporate income is taxed twice as both personal and business revenue.

A corporation is definitely not the type of business you want to set up using a form you got online. There are several different corporation sub-types depending on what your company does so you need an experienced business formation attorney to make sure it’s set up properly.

Limited Liability Company (LLC)

In a limited liability company, the owners are not personally liable for the LLC’s debts and lawsuits. When it comes to taxes, the owners list business profits and losses on their personal tax returns and the LLC does not pay taxes. When choosing a business entity type, keep in mind that LLC owners must file formal documents and pay a filing fee with the state which partnerships and sole proprietors do not have to do.

An LLC is different from a corporation in that an LLC does not issue stock, is not required to have annual meetings, and is not required to keep minutes of any meetings. If you plan to take venture capital funding in the future, keep in mind that many investors prefer to invest in corporations as opposed to LLCs. If you do plan to accept angel investment or venture capital, you should speak with a business attorney experienced in setting up LLCs because the rights of the investors need to be detailed in the LLC’s Articles of Organization or investor rights agreement.

Why You Need a Business Formation Attorney

Things change. When setting up a new business, you want a business structure that limits liability and taxes while being flexible enough to accommodate plans for investment and growth. You need someone who can help you answer questions like:

  • Who has control and how much?
  • Who has liability and how much?
  • What is the cost and complexity of this business entity?
  • Is this business entity flexible and will it work with future needs?
  • What are the tax implications for this business entity?
  • How much work will this business structure be to administer?
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