Excerpt from January 2007 Upbeat Times
Organize Your Business!
It’s a brand new year, and it’s a good time to take a look at the right form of business for you. “Things are working just fine, why change?” you say? Well, you might be right, or you might be a lawsuit away from losing everything you own.
This month, I’ll define the major type of business organizations. Next month, I’ll give you a checklist that you can follow to select the one that is best for you. Here are the most common types:
Sole Proprietorship. Most of us start our businesses as sole proprietors. The advantage is that there is practically no startup costs. The big disadvantage is that all your personal assets are at risk if your business fails or a catastrophic accident occurs while you are operating you business.
General Partnership. If you are in business with someone else, you are in a partnership. In a general partnership, each partner is personally liable for the acts of the other partner.
Limited Liability Partnership. This is a special type of partnership in which the general partner is completely liable for the acts of the partnership, and the limited partners are only liable to the extent of their financial investment in the partnership.
Limited Liability Company. In this type of organization, the investors, called members, are only liable to the extent of their financial investment in the company. This is similar to the corporation, but the members are free to set up as many or few rules as they wish in the form of an operating agreement, as well as more flexibility on how the profits are divided up.
Corporation. This is the tried and true way to limit your personal liability and to give structure to your organization. There are two major disadvantages for the small business person: First, the law imposes many strict rules designed to protect minority shareholders and directors and even requires annual shareholder and board meetings. If you miss even one of the important rules and the corporate shield could be pierced, and you could be personally liable. The second disadvantage for the regular corporation is that the profits from your operations are taxes twice: once at the corporate level and again when the net profits are distributed to the shareholders. Fortunately, the double taxation issue can be solved by declaring that the corporation is an “S” corporation, eligible for small companies who do not exceed certain criteria.
Do the choices seem overwhelming? Never fear, next month I’ll give you a checklist that will help you make the right choice for you.
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