Many small businesses start out as a part-time gig. Some stay that way and others expand into full-time enterprises. Many small businesses start life as sole proprietorships, meaning that the owner or owners are the company. A common oversight for the start-up involves failing to take advantage of the legal protections available for the owner(s) in the case of adverse liability-oriented action, like a lawsuit, against the company.
There are several state-sanctioned and certified forms of business. There is the Corporation, in two forms, an -S type and a -C type, in which the business entity is recognized by a state and the owners are apportioned shares in the corporation. The Limited Liability Company, or LLC, mixes features of the traditional corporate and partnership structures and is popular with small business because the required reporting is typically much less involved than with a corporation. There is also the Limited Liability Partnership form of partnerships that’s appropriate for companies with professional associates, like lawyers, accountants, doctors, architects and so forth, where the product that creates revenue is the output of the partners.
All forms of company entity have common advantages relating to taxes and the legal protection of the owners. Different states offer different features, but the theme is the same. For instance, except in cases of criminal fraud, the debts of a corporation don’t accrue directly to the owners, and neither do the assets. That is to say, if your corporation buys a million widgets and the widget market goes south, you are not personally liable, in most cases, to pay that bill personally. You are a shareholder and will suffer through the devaluation of the shares of the company, but bill collectors won’t be towing away your car to satisfy the widget bill. More importantly, any of the traditional entity structures allow the owners to transact on the company, that is, buy and sell shares or the company in its entirety which is important should one of the owners desire it or in the case of death or disability. There can also be distinct tax benefits for any of these forms. Of course, this is a very simplistic explanation, meant to provide an overview in broad strokes for what I’m getting to, and you should consult with local, licensed professionals regarding your choice of structure. If your organization is considered charitable, different rules apply in addition. An attorney in your jurisdiction that does business law and an accountant versed in business tax matters should be your very first stop.
There’s no excuse to remain a sole proprietor. Incorporating gives your organisation legitimacy, the ability to be funded by investors and banks, provides important protections legally and financially. It’s not complicated, with the proper legal advice, and is very inexpensive. And, it’s easy enough to do yourself.
As an aside, I would mention that you need not incorporate your organization in the state in which your business resides. Certain states, like Delaware, Nevada and Montana, have advantages to the business owner when forming the entity in those states, though those advantages, and disadvantages, are beyond the scope of this article. Still, it bears research on the part of the businessperson with appropriate legal advice.
There are literally thousands of services available to help form the business entity of your choice. Unless you have a deep abiding fear of web browsers, those services are mostly unnecessary. Every state has web-posted information on how to form a business entity in that state. North Dakota is a randomly selected example. Like most states, their form to incorporate is a one-page affair, with easy-to-follow instructions and with a handy, attached credit card form for your $100 fee (for that state.) Mail return for all states seems to be within two weeks after receipt and certification. It’s important to check with your financial institution to see whether they require particular documentation from your state of incorporation so that you can order it at the same time as making your filing.
Of course, there are always reporting and compliance requirements for these entities. among which are the requirement for company or partnership “papers”, like stock certificates, articles of incorporation, operating or partnership agreement(s), as applicable. Most companies involved in the business of “getting you incorprated” are more than happy to sell what is called a “Black Beauty,”, that is a book appropriate for your entity-type with all of the start-up paperwork as would comply with the requirements of the state in which the business is incorporated, included a corporate seal so that you can make things officially certified by the entity. The prices for these kits range into the stratosphere, it seems, but your friendly neighbourhood lawyer probably relies on Blumberg for their corporate kits and there’s no reason why you can’t. For instance, Blumberg has a “Spartan” LLC kit for $59.50, at the time of this writing, that even includes the seal, plus shipping and tax as applicable. It’s also possible to have the kits arrive already filled-out, so that, for a few dollars more, your book is done and ready to go.
In short, it’s possible to save money on the process of protecting your business and, in the process, use those saved bucks to get the legal and tax advice that anyone should seek in this circumstance. Of course, the business owner will also learn quite a bit about what their business structure means to everyone else, and that’s a very good thing.
