BUSINESS STRUCTURE OPTIONS

Small business incorporations are simple to establish. However, first ensure that incorporating your business makes sense given your particular situation.

Whether you choose a sole proprietorship, general partnership, or a form of small business incorporations, you will be better educated to make the choice that is right for you.

”The most important thing about education is appetite.”
- Winston Churchill

The most important thing to remember when considering small business incorporations vs. establishing any other type of business structure, is your personal comfort level for risk and liability.

Consider this important question:

What happens if my business gets sued - am I also personally liable?

The answer will vary depending on the legal formation of your particular business. (Hint: Small business incorporations can protect an owner from personal liability.)

Now that everyone is paying attention, let’s define a few of the most common business types you may wish to consider. We will quickly define sole proprietorship, general partnership, and several kinds of small business incorporations.

Sole Proprietorship

A sole proprietorship is the simplest form of business. One person owns the entire business - earning all profits/owning the assets and assuming all the losses/liabilities.

A sole proprietorship is frequently chosen for start-up businesses because it is easy to organize and flexible to operate. Sole proprietors are considered to be self-employed and are eligible for KEOGH accounts for their retirement funds.

Sole proprietorship taxes are reported on IRS Form 1040, Schedule C, as part of the owner’s personal income tax return.

The business owner is personally liable for all the obligations of the business.

General Partnership

The Uniform Partnership Act that is in force in most states defines a partnership as "an association of two or more persons who carry on a business for profit as co-owners." A partnership can hold title to real property in the name of the partnership, holding by tenancy in partnership.

One tax advantage of this form of ownership is that the partnership itself does not pay taxes. However, the partnership must file a partnership information return (Form 1065) showing how much income the partnership distributes to each partner (Schedule K-1). Then each partner is responsible for paying his or her own tax.

All partners are personally liable for the obligations of the partnership.

C-Corporation

The C-Corporation is the first form of small business incorporations that we will cover here. A C-Corporation is a legal entity, chartered by a state, or by the federal government. All small business incorporations, in a business sense, are separate and distinct from the person(s) who create it.

Small business incorporations can own property, enter into contracts, incur debts, pay taxes, sue or be sued. Small business incorporations:

• Have limited liability whereby owners can only lose the amount invested
• Can expand ownership by sale of additional shares of stock
• Can easily transfer ownership through the sale of shares of stock
• Continues to exist beyond the life of individual owners
• Has centralized management in a board of directors, president, secretary and treasurer.

A C-Corporation is subject to regulation in the state where incorporated and in the states where they do business. Special corporate income tax rates apply. Dividends are paid to shareholders from earnings of the corporation.

S-Corporation

A corporation that is taxed as a partnership by the IRS, provided it has 25 or fewer shareholders and meets certain other requirements. Thus, sub-chapter “S” business structure can distribute income directly to shareholders, avoiding the corporate income tax but enjoying the advantages of the corporate form.

An S-Corporation avoids the double taxation of corporate ownership.

Closely-Held Corporation

A corporation owned by just a few people, all or most of whom are directly involved in the conduct of the business, with few shares of stock held by outside investors. Differs from a “closed-corporation” because enough shares of stock are publicly held to provide a basis for trading. Shares held by the controlling group are not likely to be available for purchase by the public.

Closed Corporation

A corporation owned by a few people, all or most of whom are directly involved in the conduct of the business, usually members of the management family. Differs from a “closely-help corporation” in that shares are not for sale to the public nor are shares held by outside investors, and there is no public market.

You now have a pretty solid overview of the most common types of small business incorporations, in addition to a basic understanding of a sole proprietorship and partnership.

Choosing your legal structure,(ie. sole proprietorship, partnership, or one of the small business incorporations) is a process that has to balance concerns and issues regarding liability exposure, ownership rights, tax responsibilities, and the administrative burden of the legal structure that is chosen.

The decision-making process should not be taken lightly. We also recommend your final choice be made in consultation with your attorney and/or business advisor.

Consider the following when choosing how to incorporate your new business:

”Be willing to make decisions. That’s the most important quality in a good leader. Don’t fall victim to what I call the ready-aim-aim-aim-aim syndrome. You must be willing to fire.”
- T. Boone Pickens

Some aspects of your situation may not be reflected in this program, while other issues may depend on the specifics of regulations in your state.

If you are thinking about creating a sole proprietorship or a partnership, you should contact your state agency and request the appropriate forms be sent to your attention. The process is fairly simple.

Think about how much you have learned in such a very short period of time. (Good ol’ Winston Churchill would be proud!)

What is the next step? Simple - ACT upon what you have learned. TAKE ACTION!