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So you’ve decided to start a business. What type of business structure is best for you?
You have many choices. If on your own, you can be a sole proprietor. However, you should also consider various types of business entities: You can form a limited liability company, even if you are the only member. You can form a corporation. If you are starting the company with others, you could also form a partnership – general or limited. How to choose?
What may seem like a simple question oftentimes may not be. Among the considerations should be protecting yourself (and any other “owners”) from personal liability, management, tax issues, and funding.
With respect to liability, you want to make sure that if something occurs that might result in the business being liable to a third party, you as the owner will not be personally liable. Generally, you can do that if you form a limited liability company or a corporation, but not if you’re a sole proprietor. In some types of partnerships, partners can be personally liable; in others, some partners may be and others not.
With respect to management, you want to consider how the company will be managed? Who will have the decision-making power if there are more than one owner? What type of business entity will best suit your purposes and satisfy the reasonable demands of your investors and lenders? And when you choose the appropriate form, how should you structure it?
With respect to tax issues, there are a multitude of questions to answer:
- Will the entity be taxed, and, if so, at what rates?
- Will you and the other owners be taxed on the company’s profits? In some types of entities, where profits and losses pass through to the owners, you will be. In others, you will not.
- If the company needs to reinvest profits in the business, could that result in the individual owners not receiving a distribution from the company, notwithstanding any personal tax obligations they may incur as a result of the company’s profits?
- What will the owners’ tax liability be on the distributions they receive from the company?
With respect to funding:
- What kind of investors are you contemplating?
- What types of other funding are you contemplating?
- Will you be raising money by giving equity in the company to others in exchange for their investments? Or their work? Will you be borrowing money from individual or institutional lenders? Or perhaps some combination of the foregoing?
You will have to make your investors and lenders comfortable. Investors and lenders might be more comfortable with one type of entity than another.
Finally, you will have to consider where you want to form your company: Do you want to form it in New York or do you want to form it in Delaware? Delaware is generally considered more hospitable to corporations than any other state. However, forming a business that will operate in New York, in Delaware, may not be necessary for your particular endeavor.
These are the types of questions that you should consult with your attorney and tax advisor about before starting the company so that you can know how best to proceed.
Contact me today with questions or comments.
