How You Form Your Business Matters

How You Form Your Business Matters

Starting a business is an exciting time. Founders know that they have to identify their skill and what niche it will serve. They know they have to develop a process for delivering a great product or service. They may not necessarily focus on the legal formalities. But the truth is that business formation is one of the most serious decisions any entrepreneur will make.

Different business structures offer different benefits

There are several different structures to choose from when starting a new company. The simplest is a sole proprietorship. This requires little to no paperwork to file when starting a business this way. However, there are some issues with a sole proprietorship. The biggest is that people's personal assets are not really separated from their business when it's structured this way.

Partnerships are like a sole proprietorship in that they require little paperwork. However, it is advisable for the partners to draw up an agreement for the business. This should outline the rights and responsibilities of each partner. It should also address what will happen if a partner decides to leave the business. In a partnership, the finances of the business are not fully distinct from the founders' personal finances. For example, the profits from the business will show up on personal tax returns.

Forming an LLC instead of a sole proprietorship or a partnership is a great way around this issue of commingled assets

An LLC is a limited liability company. With an LLC, the business is a fully separate entity from the people who founded it. The LLC structure is something that profits and expenses flow through, rather than the founders' personal accounts. LLCs can be founded by an individual or a group. They are governed by state laws.

Finally, there are corporations. Corporations require a lot of paperwork. In fact, Articles of Incorporation must be filed with the state. There are many types of corporations, including C and S corporations. These designations relate to the way the corporations file taxes. Corporations are separate entities from their founders. In fact, under US law, corporations have most of the same rights as people. They can own property, for example.

Business formation can be complex. Getting advice from professionals like accountants and lawyers is a wise step when creating a new business. We take pride in helping people build their dreams. We're always here to answer any questions and take the guesswork out of business formation.

Tags: business law

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