So You Are Starting a New Company, Have You Decided on a Legal Status?

Written by Small Business Magazine on October 8, 2013. Posted in Homepage

Business agreement format

Starting a new business endeavor is always exciting, until you get down to some of the details such as the legal status of a company, by-laws, and other forms, certifications, and procedures that must be carried out. Defining the legal status will have a bearing on several incredibly important factors, such as the payment of taxes, investments that can be made in your company, and the liability or financial security you can expect.

Business formation types generally fall into one of three categories when you need to determine the company legal status. Business formats include sole proprietorship, general partnership, and becoming either a Corporation or “S” corporation. There are also limited liability companies, which you may want to consider after discussion with a lawyer.

  1. Sole proprietorship.
  2. If the business will be owned by only one person, this may be the format you should choose. It is one of the most simple and inexpensive legal formats to establish, your profits are taxed once, and if there are losses then they come out of income. However, being the sole owner will also make you the only one liable if there are business debts, or legal issues taken up against you or your company.

  3. General partnership.
  4. When more than one person has ownership of a company, then this may be the preferred legal status of a company you are establishing. However, like in sole proprietorship, there is no difference between the owners themselves, and the business. This can be beneficial if you are sharing start-up costs, and responsibilities. It can also get tricky if there are liabilities and debts, as you and the other owners will need to come to some agreement on how they are to be handled.

  5. Corporation, or S Corporation.
  6. In this format, the governing individuals in the organization are separate from the organization itself, unlike in the other two options. This makes it easier to transfer ownership, and reduce personal risks. On the other hand, this is more costly to start, and is fully monitored by the federal and state government, and possibly by local agencies. Note that profits get taxed twice in this format. The first time as the income of the corporation, and the second time on the personal level when profits are paid out to the employees.

If you find that you need help in determining the legal status of a company, you may want a business formation lawyer to help you. The entire business entity formation process can be complicated, and take a long time if you do not know what needs to be done. Ultimately, you will need to determine what kind of ownership is required, what kind of liability and risk can be sustained, and what kind of financial result you want to realize from the formation of your company.

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