By Rhonda Abrams
Gannett News Service
If you're starting a business, one of the first questions you need to answer is what kind of business you're going to be.
By this, I don't just mean what kind of products you'll sell or service you'll provide, but what legal form your business is going to take.
Now, this may sound like a question that shouldn't be very important to a very small business. After all, if you're going to be a consultant or a graphic designer or an electrical contractor, why bother dealing with the government? Who needs to pay a few hundred dollars in corporation or legal fees?
But choosing a legal form affects how much you pay in taxes, who can invest in your company, and most importantly, your personal financial security.
Three things to keep in mind when choosing a legal form are:
Liability. Legally, corporations are individual entities. As such, the corporation - not individual shareholders - are responsible for the actions of the business. In other words, if something goes very wrong, and a corporation is sued, only the assets of the corporation are at stake - not the owners' personal assets. (There are some exceptions to this rule, but generally, your personal liability is greatly limited.)
Double taxation. No one likes paying taxes, and you certainly don't want to pay taxes twice - once on income for the business and then again when that income is distributed as profits to you. Instead, look for a legal form that allows for the profits of the company to "pass through" to the owners, without having to pay corporate taxes first.
Ownership. Certain legal business forms limit the number or type of people who can invest in your company. If you're seeking a large number of investors or international investors, find a corporate structure that permits such stockholders.
It's always best to sit down with an attorney - and possibly an accountant - and discuss the best corporate structure for your specific business.
When you do meet with an attorney, these are the legal structures you'll consider:
Sole Proprietorship. A business owned by one person with no formal legal structure.
It's simple. Just start your business; there's no additional paperwork.
But you have no personal liability protection. If your business is sued, you could lose everything you own - and in some cases, your spouse could lose his or her assets, too.
Partnership. A business with more than one owner who actively engages in the management of the company.
Limited Liability Company (LLC). A legal form that provides liability protection for the company's owners without requiring incorporation.
LLCs have become the form of choice for many small companies.
"S" Corporation: A type of corporation that provides a personal liability shield but permits pass-through taxation.
"C" Corporation: A corporate form that allows for the most investors and significant liability protection.
Rhonda Abrams is the author of "The Successful Business Plan: Secrets & Strategies."
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