There are five distinct business structures available in the United States, including Sole Proprietorship, Partnership, Limited Liability Company (LLC), S Corporation and C Corporation. The three most popular structures are Sole Proprietorship, LLC, and C Corporation.
Obviously, the simplest business structure is a Sole Proprietorship. Most people who start their own business without doing anything to form a separate entity are called sole proprietors. This is, by far, the simplest business form. Basically, you and your business are one in the same. In some cases, a Sole Proprietorship is the best option, but it is not always so.
Operating as a sole proprietor is certainly the easiest and cheapest form of doing business. You basically open the doors and go. The temptation to operate this way is great and many succumb. The shortcomings of this form of business are great also. There is absolutely no protection between you and your business and there are no tax benefits. There are no particular record keeping requirements which is quite easy but often leads to sloppy business practice. Sloppy business creates poor decision making and sets up failure. At the very least you become a sitting duck for IRS audit and lawsuits. Planning, at the beginning, can save you money on an ongoing basis and protect the assets that you have worked so hard to accumulate.
The decision you make when choosing one business structure instead of another will have an effect on the future of your business. The decision you make will affect your ability to attract investors, transfer your business to someone else, sell it or bring new people into the business (people of different qualities, such as managers vs. partners vs. angel investors vs. stock holders).
The structure you choose also affects the exit strategy of your business. The structure you choose today affects what will happen to your business if something tragic should happen to you, or if you decide to retire or sell your business to a competitor.
Ideally, you need to think about the structure before you start a business. If you are already running a business, though (or if your hobby is turning into a business), then you need to decide on the business structure as soon as possible. If you decided that today is the day you will pick a business structure, then make sure that today really is the day you do it. Do not put this decision away until you get “big enough.”
Do not think that it will be easy for you to change your business structure whenever you feel like it. Although you can always register a new company and transfer assets to that new entity, you cannot erase the past; sometimes the past comes back to haunt you.
What if you start a business as a sole proprietor and do something wrong without any immediate consequences. Later on, you might finally get “big enough” and incorporate. All is well, until the day when you get sued for something you did years ago. Now as a big company, you present a lucrative target for others to sue you. Because they might sue you for something that occurred when you were operating as a sole proprietor, your new business structure might not be able to shield you from the liability.
You might have an investor dispute that originates in the days before you were incorporated, because some decisions you made back then can influence the future of your venture. Your future partners or investors (that you never thought you would have back when you were small) might blame you personally for it.
A person you hired in the past to do a small job may have done something wrong, and now you are personally responsible for it, even many years later.
That is why LegalCreation recommends forming and LLC or Incorporation depending on your business and priorities.
By: Stefano Grossi
When you start a business it is important that you have some idea of the legal obligations and restrictions that you will be required to adhere to. The most important thing to think about when you first start your business is what type of company it will be. The options are a sole trader, a partnership or a limited company. The structure of your company will vary on the option that you choose.
If you decide that your company will operate as a sole trader, you will not have any legal responsibilities to adhere to. It is the simplest form of business model and would be appropriate if the business that you plan on starting is small. Operating as a sole trader means that it is you who carries the responsibility for anything that might go wrong. This means that if your business ends up getting into a lot of debt, you will be personally responsible for ensuring that the debts get paid and your personal savings, assets and property will be liable to be used if you are unable to pay back your debts. You need to keep records of your income and outgoings to give to the tax office. You should also inform the tax office of your plans to start up a sole trading company as it will change your tax status and mean that you would get taxed as a self employed person.
If you start a business with another person, then your company will operate as a partnership. You will be governed by the Partnership Act 1896 which may not be what you wish. To avoid being caught out by this, you should have your solicitor write up a Partnership Deed which should detail how your partnership will work, what you wish to get out of the business and what will happen if the business comes to an end.
Finally you may want to run your company as a limited company. By running a limited company, your personal assets are usually safe if things go wrong. The downside to this is there are fees for starting up a limited company.
When you go to register your company name you should try and makes sure that your name is different to any others trading in your area or you may be liable to be sued as ‘passing off’ which is the act of getting trade by using someone else’s name. If the name that you are registering is for a limited company, you will have to ensure that the name is not already registered.
If your business will involve trading you should ensure that you research into trading standards and what your rights and responsibilities are as a business and the rights and responsibilities of your customers. You should also ensure that you write up your own terms of business which should detail things like your terms of payment and returns. You should consider getting your terms looked over by a commercial solicitor to ensure that they are fair to both you and your customers.
By: Rebecca McLellan
According to the Small Business Administration, www.sba.gov, your small business has to comply with numerous local, state and federal regulations. Research the regulations carefully to avoid penalties and other serious consequences. The following is a non-exhaustive list of the most common regulations that affect small businesses.
Business Licenses – State, city, or county.
Certificate of Occupancy — If you are planning to occupy a new or used building.
Business Organization — Consult a tax accountant or attorney prior to deciding which form of legal structure is right for your business.
Fictitious Business Names — If you use a “dba,” you may have to register the fictitious name pursuant to the Trade Name Registration Act.
Protecting Your Idea — Apply for trade name, trademark, patent and copyright protection with the state and federal government
Tax Requirements — You must withhold federal income taxes, state income taxes and FICA (Social Security) from wages paid to employees.
Federal Employer Identification Number — Apply at www.irs.gov.
State tax information – Apply at your state’s website or call your state government.
Federal Self-Employment Tax – Apply at www.irs.gov.
Business Insurance — You must have business insurance to protect your business such as: Liability, Property, Business Interruption, Key Man, Automobile, Office and Director, Home Office, Errors and Omissions.
Sales Tax Number – Required for retail purchases, rental, storage, and consumption of tangible personal property and certain services.
Unemployment Insurance Tax — required by the state if the company has one or more employees for 20 weeks in a calendar year or pays gross wages of $1,500 or more in a calendar year.
Immigration Act – Requires Employment Eligibility Verification Form I-9.
Health and Safety — The Federal Occupational Safety and Health Administration (OSHA) outlines specific health and safety standards.
Workers’ Compensation — If business employs three or more people.
Minimum Wage –All business entities are subject to the federal minimum wage, overtime and child labor laws.
Bar Coding — The Uniform Code Council, Inc. assigns a manufacturers’ ID code on the packaged products you sell.
For more information about these and other important business and legal topics, please visit our website at http://www.IndigoBusinessSolutions.net, Copyright 2006. Indigo Business Solutions is a registered trade name.
The future of your business starts here.
By: Jo Ann Joy
Your business name can develop to become one of your most valuable assets, through marketing and the development of a relationship between the public and your brand. This is why it is important to protect your name from misappropriation. When you start a business you might naturally be aware of the need to clear the company name with companies house, and if you intend to develop an online presence you may also check the availability of domain names for your brand, but too often businesses are not aware of the importance of trade mark registration.
Differences between Company names, Domain names, and Trade Marks
Registration of your company name, and your domain name do not offer the level of protection necessary to prevent other businesses from using your brand names and logos in connection with competing products or services. Also if someone else has trade mark rights over the name, then your company or domain registrations can be cancelled. To properly protect your brand it is necessary to search the trade mark registers, and if the name is available to you to register, then apply to secure a trade mark.
Unregistered Trade Marks and Passing Off
Since 1994 unregistered trademarks are not afforded protection under the Trade Marks Act. So, if you want to stop someone using your unregistered brands, you can only do so through a different type of legal action called ‘passing off’. This action arises out of the common law, and its success involves proof of damage to your reputation, and confusion by members of the public, among other things. This type of legal action can be extremely expensive, and is difficult to establish.
It is important therefore to register a trademark, and to do so before you begin to use a name for your business. As part of the process you will discover whether someone else has rights over a similar name, allowing you to make a change if necessary, rather than trading with a name that you cannot own, and that you may later be prevented from using. If the name is available, then it is advisable to register and thereby secure the necessary ownership rights straight away. If you instead delay registration, waiting to see if your venture succeeds, you may find yourself unable to secure. This could happen if someone else, in the meantime, registers a trademark which prevents your registration succeeding.
Protecting the Goodwill in your Brand
So, trade marks are an investment in the future success of your business. The more established and well known your brand becomes, the more likely others are to piggy back on your brand success. Goodwill in your business name is built up through substantial investment and marketing, and to avoid wasting this investment it is crucial that you check the availability of the trademark beforehand.
A proactive strategy for protecting your brand will save business funds in the long run, providing a powerful tool to dissuade imitators and counterfeiters, and to take action to enforce your rights when necessary.
By: Shireen Smith