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What are the choices when deciding to form a business?
- Sole Proprietorship.
- Partnership.
- Corporation.
- Subchapter S corporation.
- Nonprofit corporation.
- Limited liability company.
What are the differences between them?
Sole Proprietorship
A sole proprietorship is owned by one person, who may also be the only employee. The owner receives all the business profits and must bear all the losses. Most small businesses are sole proprietorships.
The sole proprietor is personally liable, or responsible, for any lawsuits that arise from accidents, faulty merchandise, unpaid bills, or other business problems. This means the winner of a lawsuit against a sole proprietor can not only collect money from the business but also ask a court to force the owner to sell personal property. The owner could lose his house or car, for example.
On the other hand, a sole proprietorship is the simplest business entity and has the least administrative burden, such as a filing with the state and separate tax returns.
Partnership
A general partnership consists of two or more owners who make decisions for the business together and share profits, losses, and liability. Partners can bring different strengths, skills, and resources to the business. To make your business idea a reality, you may need a partner who can contribute something you don't have to the success of the business, such as financing or specialized knowledge.
Sometimes, partnership disagreements can destroy a business. We recommend that partners always see a lawyer and draw up a partnership agreement that carefully defines the responsibilities of each partner.
A variation of the general partnership is the limited partnership. Basically a financing vehicle, in the limited partnership passive investors invest only their capital in the entity which is managed by the general partner(s).
Corporation
The word "corporation" is derived from corpus, Latin for "body." A corporation is a legal body composed of stockholders united under a common name. Corporations issue stock and elect a board of directors, who manage the company.
The corporate legal structure offers two key advantages:
- A corporation may issue stock to raise money. Essentially, the company sells
pieces of itself to stockholders, who then become owners of the company. This is called selling equity (ownership) to raise money.
- A corporation has limited liability. Unlike sole proprietorships and
partnerships, the owners of a corporation cannot have their personal assets used to pay business lawsuits settlements or debts. Only the assets of the corporation can be used to pay corporate debts.
The main disadvantage of corporations is that corporate income is taxed twice, assuming the corporation is a "C" corporation and the "S" election has not been made (see below). First, the corporation must pay corporate income tax on its earnings. Later, when the corporation distributes its earnings as dividends to stockholders, the stockholders must include the dividends as personal income on their tax returns.
Subchapter S Corporation
This type of corporation limits the number of stockholders to seventy-five. If offers most of the limited liability protection of the corporation, but Subchapter S corporate income is taxed only once-as the personal income of the owners. Many small companies are Subchapter S corporations because it's a good way for a small company to avoid the double taxation of corporations.
Nonprofit Corporation
A nonprofit corporation is set up with a specific mission to improve society. Churches, museums, charitable foundations, and trade associations are examples of nonprofit corporations.
Nonprofit corporations are tax-exempt. They do not pay taxes on their income because the income is being used to help society. On the other hand, nonprofits may not sell stock or pay dividends. No one owns a nonprofit corporation.
Limited Liability Company
A new way to organize a small business, the limited liability company (LLC for short), may be in your future. Doing business as an LLC offers several advantages over partnership or a corporation. Unlike general partnerships, LLCs give owners (called "members") protection from claims of business creditors. Individual LLC members' liability for business debts is limited to the value of their ownership interest in the business-hence the name "limited liability." And all LLC members can take an active role in the operation of the business without exposing themselves to personal liability, which limited partners cannot do. Limited liability companies usually identify themselves with an "LLC" after the name of the business.
Are there other options?
Described above are some of the basic features, but not all, of the main business vehicles available. There are others, such as joint ventures, limited liability partnerships, professional corporations, etc. which have not been discussed and may be best suited to your needs. Select a business vehicle only in consultation with an attorney.
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NOTE:
The answers to the FAQs are simplifications intended for a lay person. The facts in your situation may be different and lead to a different outcome. Consult a professional for advice before proceeding.
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Contact Edward Gonzalez:
Edward Gonzalez, Professional Corporation
VA Office
1660 International Drive, Suite 400
McLean, VA 22102
(703) 883-0016
DC Office
2405 Eye Street, NW, Suite 1A
Washington, DC 20037
(Foggy Bottom metro stop)
(202) 822-4970
MD Office
1300 Spring Street, Suite 500
Silver Spring, Maryland 20910
Phone: 301-772-1002
E-mail: info@money-law.com
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