Forming a Business
Starting a new business venture can be an exciting and challenging time for any entrepreneur. Before you can start providing value to your customers, though, you will need to overcome the legal hurdles involved in creating your new enterprise. Forming the right kind of business entity and complying with all applicable regulations are among the most important steps in the life of a young company. Not getting these steps right can lead to hefty fines, undue tax burdens, and could even expose your personal assets to seizure by your business creditors. Enlisting the help of an experienced attorney ensures your business is set up for long-term success.
Some Considerations When Creating Your New Business.
- What kind of goods or services will you be selling?
- Do you plan on taking on capital investment?
- Who are you planning on going into buisiness with?
- how can you limit your personal liability for business debts?
- How do you plan on sharing profits and losses?
- how many people will act as owners or executives?
- Are you interested in issuing different kinds of stock?
- How many shareholders are you preparing to have?
- How can we limit your tax burden as much as possible?
What Kind of Business Structure is Right For You?
The simplest type of business entity to establish and the most common. This entity is owned and operated by a single individual. The primary advantage of the sole proprietorship is how easy it is to form. New York only requires registration of a business name and obtaining whatever licenses are necessary to sell your particular goods or services
There is, however, a major drawback to the sole proprietorship. As the owner and operator, you will be personally liable for all debts and obligations of the business. if debts or lawsuits become too expensive for your business to pay, creditors can come after your home and personal assets.
A partnership involves two or more individuals who share profits and losses of a business. In a general partnership, each of the partners are personally liable for the partnership’s debts, and are all equally responsible for managing the business.
This entity is easy to establish, requiring only the drafting of a partnership agreement, registering the name of the entity, and obtaining the proper licenses and permits for your industry. The main drawback, however, is that general partners are exposed to personal liability for the partnership’s debts and obligations. Like in a sole proprietorship, the homes, accounts, and personal assets of the owners of a general partnership can potentially be accessed by the partnership’s creditors if the entity’s debts outweigh its assets.
Limited partnerships, like general partnerships, consist of two or more individuals who are responsible for managing the business and sharing the profits and losses.
Limited partnerships allow for the creation of two types of partners, general partners and limited partners. General partners manage the business and assume personal liability for the partnership’s debts and obligations. Limited partners, on the other hand, invest capital in the partnership, but are not involved in the management of the partnership. These limited partners have personal liability limited to their investment.
This structure is an attractive option for partnerships that want to attract investors who may want to provide investment capital to the partnership without wanting to take on the personal risk that comes with being a general partner.
Unlike a sole proprietorship or partnership, a corporation is an entirely separate entity from its owners. This means that the corporation can own assets, enter into contracts, and file lawsuits independently of its owners. Importantly, this means that shareholders are not personally liable for the debts or obligations of the corporation.
Additionally, C corporations can issue an unlimited number of stocks and issue multiple different classes of stock. This makes the C corporation appealing to investors and able to take on an unlimited number of investing shareholders.
The downside of a C Corporation is that they are subject to double taxation. The corporation itself is taxed on profits, and the shareholders are taxed again on dividends. If you are planning to start a small business with only a few shareholders, this double taxation can significantly eat into the profit you ultimately take home.
Like a C Corporation, an S corporation is a separate legal entity from its shareholders that can own assets, enter into contracts, and file lawsuits independently of its owners. The S corporation also protects the assets of its shareholders from business liabilities.
The main difference between a C corporation and an S corporation is taxation and share distribution. An S corporation offers pass through taxatioin meaning the profits and losses are reported on the individual shareholders tax returns. The corporation itself is not taxed, thus avoiding the double taxation that a C corporation is subject to. However, in exchange for passthrough taxation, an S corporation is limited to only 100 shareholders and restricts the types of shareholders and the type of stock that can be issued.
An S corporation often makes sense for small business owners with only one or two shareholders that do not plan on massively scaling up their operations or taking on large numbers of capital investors.
The LLC can be best thought of as a hybrid between a partnership and a corporation. If you are thinking of starting a partnership but are concerned about personal liability for business debts, this structure may be an appealing alternative to a partnership. The main advantage of an LLC is limited liability protection for its members. Generally, members are not personally liable for the debts and obligations of the business.
In addition to limited liability protection, LLCs also qualify for passthrough taxation, meaning they are not subject to double taxation as C corporations are.
The main disadvantage of an LLC is in startup costs. In New York, an LLC must publish notice of formation in at least two local newspapers for two consecutive weeks. Depending on where you live in New York, this can be quite costly, and the fines for non-compliance are higher than comparable fines for corporations and partnerships.
Why Start A Business With Us?
The truth is, there is more to getting a new business off the ground than simply filing the articles of incorporation. After your business is "registered," you still need to file articles of incorporation, appoint shareholders and executives, create and distribute shares, hold official board meetings, and obtain industry-specific licenses.
Additionally, depending on the kind of business entity you form, there may be other state-specific requirements you need to fulfill before your business can be fully operational. For example, in New York, certain classifications of corporations, such as an LLC (limited liability company), have publication requirements. In order to be in compliance with state law, an LLC must publish notice of its formation in local newspapers of the county where it intends to operate. This is just one example of many state-specific regulations that an online document filing service likely won't even tell you about, which could lead to expensive fines for new businesses that cannot afford them.
When you form a business with a professional attorney, you get more than a service to file your paperwork. During our free consultation, we will listen closely to your plans for your new enterprise and help you choose the structure that is right for you. We'll then work with you to draft customized bylaws and shareholder agreements to best suit your needs. Before we are done, you will understand how to stay properly registered and compliant with all state and local regulations for the lifetime of your business. Most importantly, if you ever decide to change the structure of your business, you will already have an experienced legal team that knows your business, ready to help.