There are four basic forms of business ownership. For a quick explanation of these four entities, follow these links:
In a proprietorship, one person (or married couple) operates a business. The owner’s assets are all committed to the business.
- Advantage: A business can be started at the lowest possible cost
- Disadvantage: The debts and liabilities of the business are also the debts and liabilities of the individual owner.
If there are two or more owners, a partnership or corporation is necessary. A partnership is an agreement of two or more people to operate a business jointly. It is important to get the partnership agreement in writing. When the honeymoon ends, it will be very difficult to enter into a partnership agreement because of disputes over exactly what was verbally agreed.
- Advantage: Very low start-up cost.
- Disadvantage: Each partner is personally liable for all business debts and Liabilities.
A corporation is a separate legal entity, responsible for its debts and the acts of its employees. If maintained properly, owners of the business are not liable for the company’s debts. Stockholders (as well as the corporation) are responsible for necessity when the owner has assets to protect.
The Incorporation Process
Incorporation begins with a meeting to discuss how to organize the corporation.
Incorporation can be completed in three days. In addition, it can take the Secretary of State two or three weeks to return the filed articles. You should allow for three weeks.
A stockholders meeting and a board of directors meeting are needed to get the business started. You should elect officers, and a board or directors authorize stock.
If the corporation is to be owned by more than one person it’s a good idea to enter into a stockholders agreement. While not required it can save trouble later. The agreement includes restrictions on the right to sell the stock, and what happens to the stock if an owner dies.
- Advantage: Maximum protection against liability for the acts of others. Easy to transfer all or part of the business to the owner’s family, estate or trust.
- Disadvantage: Higher cost of formation and maintenance.
LLC’s are becoming popular. An LLC is a company that has limited liability like a corporation but is treated like a partnership for tax purposes. The LLC is extraordinarily flexible and should be used when more flexibility is needed than the corporate form provides. The corporate form has the advantage of being well known and therefore more predictable. The Corporate form should be used unless there is some particular reason to use an LLC.