So, You Want To Start A Business?
If you want to start a business, the first question is how do you begin? You can begin your business just by operating as a sole proprietor either in your name or in a chosen business name. However, without filing any legal documents, you are taking on complete personal liability for your actions in the business as well as anyone who may be conducting business for you or acting as your agent. In order to avoid total personal liability, there are a variety of business organizations to choose from.
Before you incorporate, you will want to know:
- Who will own the business?
- Who will manage the business?
- Who will receive profits from the business?
- Who will be responsible for the risk of any loss?
By answering these four questions, you will help decide what type of business you want to organize. A few additional things are important to understand and consider when organizing your business.
Taxation and Finance
One key question in deciding what type of incorporation would be best for your business addresses how to handle taxes. There are generally two types of tax schemes for a business: taxation on corporate income of the business or flow-through/pass-through taxation on the personal income of the owners and not the business itself. The choice of taxation scheme also involves the level of liability held by the owner(s). Therefore it is important to consider both the ramifications of tax and liability when considering which type of business organization is preferred.
Will you be the sole owner of your business or do you plan to work with a partner or partners? A general partnership will hold you personally liable for not only your actions, but also the actions of your general partner(s). Creating a partnership agreement is extremely important for establishing the intent of the partners and the rules of your association. Just like writing a pre-nuptual agreement, you want to consider all future possibilities such as: the rules of association, how to add new partners, who receives what types of profits, how are debts managed, who will manage the daily business, what would be the requirements to sell the business, how could a partner dissociate, and how would the partnership be dissolved. A well thought-out partnership agreement should have established guidelines, but also be flexible enough to handle the unexpected. The partnership agreement cannot be used to avoid all tort liability, but liability can be limited based on the type of partnership you choose.
In order to limit the liability of some partners, a partnership may establish at least one general partner and additional limited partners. The limited partner cannot take part in the control of the business, but may invest in the business and receive profits. The general partner acts in the interest of the limited partners and owes a fiduciary duty of undivided loyalty and fairness in managing the affairs of the business.
Principals and Agents
First, it is important to know who the players are in a question of liability. The principal is the one who has the power to control the business, consent to a relationship with an agent, and benefits from the agent’s work. On the other hand, the agent is the person who takes action. For example, an attorney operates as an agent for a business. The agent may be authorized to conduct only a single transaction or a series of transactions in the continuity of service. Determining what type of agency relationship exists will depend on the agreement between the principal and the agent as well as their conduct of business.
There is another type of relationship between a principal and a worker that may significantly affect the principal’s liability and that is the role of an independent contractor. Although an independent contractor may be authorized to act on behalf of the principal, the level of control the principal may exert over the contractor is the determining factor of whether a principal can be held liable for the contractor’s actions or not. Determining the relationship between a principal and a worker as either an agent or independent contractor must assess the unique relationship and duties carried out in the business.
Types of Businesses
A corporation is created when Articles of Incorporation are filed. The owners are most limited from liability in a corporation. The Articles of Incorporation detail the association or dissociation of new owners without the consent of the other owners. Management of the business is vested in directors and officers who are not necessarily the owners of the business. The corporation is taxed as well as the dividends to the owners.
Limited Liability Company (LLC)
A limited liability company must file Articles of Organization to be formed. Owners are members of the company and function under the guidelines illustrated in an Operating Agreement. The owners accept limited liability for the company but may retain management control.
Limited Liability Limited Partnership (LLLP)
This is a relatively new type of business organization. Filing Articles of Organization is required to create the LLLP and liability protection may be extended to the general partners. The details of the partnership agreement are vital to creating this type of business organization and detailing the degree of liability, fiduciary duty, and other duties within the partnership.
A limited partnership is created when Articles of Organization are filed. There must be at least one general partner and one limited partner to form the limited partnership. The general partner may be an individual or can be a corporation in order to limit personal liability. The general partner assumes the management and control of the business and owes a fiduciary duty of loyalty and fairness to the limited partners.
You are probably familiar with many nonprofit corporations. But if you are interested in filing a nonprofit corporation, it is important to know the differences between a 501(c)(3) and a 501(c)(4) or a 501(c)(6) and a 501(c)(7). These are tax code distinctions that have specific requirements in determining the tax liability of your nonprofit. It is also important to know not only your nonprofit’s tax liability but also whether individuals and business who donate to your nonprofit may receive a tax write-off as well. Do not try to guess when it comes to the IRS, be sure to consult a professional before claiming tax-deductible status.
These are only a few things to keep in mind when starting your business. In order to best defend yourself against lawsuits and avoid liability, you should consult an attorney on your specific needs and interests. There are many resources available to give you a general overview of how to file your business. But in order to properly protect yourself, consulting an attorney is the best way to assure you incorporate in the best way to suit your needs.
We have been helping businesses incorporate for over 20 years. Trust us, it is better to start your business well-informed of the options and ramifications than to try and correct it after a disagreement. We also help negotiate business disputes, whether between partners, agents, contractors, creditors, or debtors.
Our goal is always to get you full and fair compensation for any loss or injury you have sustained. If you are being sued we work hard to minimize, reduce, or avoid your liability for an alleged wrongdoing. We know from experience that litigation is costly. We employ all alternative means for dispute resolution including negotiated settlements, mediation or arbitration, to help you get the outcome you want ant the lowest possible cost.
When two or more individuals agree to start a business a partnership has been formed. There are no filing requirements to establish a partnership, but without any documentation the partners accept personal liability for their business as well as the acts of their partners. Liability may be limited by creating a Partnership Agreement, filing Articles of Organization, or Articles of Incorporation.
Any individual business owner may operate a sole proprietorship. There are no filing requirements to establish a sole proprietorship, but without filing business organization documents the proprietor also accepts complete personal liability for the business.