IndianaStartup.com » Business Types

Starting a Business – Choosing The Type of Business to Form

Brian Powers — Sun, 21 Jun 2009 20:11:12 +0000

So, you have come up with the next great idea and you are ready to begin building your fortunes. One of the first questions you should ask is “what type of business should I be,” or as we lawyer-types put it, “what choice of business entity should you make”? Choosing the proper legal entity with which to conduct business is one of the most important decisions a business owner faces. This early decision will determine myriad other issues including responsibility for tortious acts, complexity of the entity, ability to transfer interests in the entity, ease of additional capital infusions, protection of intellectual property, and, of course, liability for the payment of taxes, to name just a few.

So many choices - will you make the right one?

The list of available entity forms is fairly extensive. From the more traditional corporations and partnerships to the more exotic state business trusts and conduits, it seems there is a form for everyone, and in most cases, multiple forms. In some instances, it may be appropriate to forego a separate entity and conduct your business as a sole proprietorship. In a sole proprietorship, the business is conducted in the owner’s individual capacity. Perhaps intuitively, a sole proprietorship offers no protection from liability, but it is the simplest way to conduct business. Generally, no separate documents or records need to be filed with any governmental authority, including the Internal Revenue Service.When a business owner wants to sell his or her sole proprietorship, it will always be a sale of the underlying business assets.

Future blog entries in this series will focusing on the three most common types of entities — partnerships,limited liability companies, and corporations. Each of these has important characteristics that distinguish one from the others. By recognizing these differences, you can begin to highlight the factors that will influence your decision on which form of entity to select.

My start-up business law practice works with new and prospective business owners to aid in the purchase, structuring and formation of a new business. We also provide convenient, fixed pricing for certain business formation legal services. Contact us today at inquiries@bvplegal.com.

Five Terrible Reasons You Failed To Incorporate Your Online Business (davidrisley.com)
Business Incorporation (wealthyways4you.com)
Forming an LLC May Be a Wise Choice For Your Small Business (stepbysteptips.com)
Sole Proprietorship: Is It For You? (killerblog.com)
Startup: Clock Starts When You Incorporate (startupprofessionals.com)
The Function of Transactional lawyers (professorbainbridge.com)

What state should your business incoporate in?

Brian Powers — Thu, 28 May 2009 22:11:31 +0000

Martin Zwilling over at Startupprofessionals.com has a nice post regarding why start-up busineses should consider incorporating / organizing their business in their home state. The post can be found here, but here is a brief summary:

Don’t automatically flock to incorporating in Delaware. Sure there might still be some advantages to doing so, but they don’t really apply to start-ups.
In Indiana, where I practice law, the filing fees for incorporating a business are inexpensive and the process is relatively straightforward – not the case in popular states such as Delaware and Nevada.
Attorneys in your home state, if you are using an attorney (hopefully you are), will be more familiar with your state incorporation laws.
Your company may qualify for an intrastate securities law exemption in the event it offers securities for sale.
There is no need to register as a foriegn entity in your home state – and added expense if you incorporate elsewhere.

As he points out, there are many other concerns that should be addressed when determining in what state you should incorporate – concerns you should address with a corporate attorney in your home state.

Startup: Clock Starts When You Incorporate (startupprofessionals.com)

Starting a Business – Forming an LLC (Limited Liability Company)

Brian Powers — Wed, 06 May 2009 22:40:58 +0000

Beginning in the late 1980s, various states began exploring a hybrid entity, one in which co-owners would enjoy the liability protection of limited partner status and the management participation feature of the general partners. Wyoming was the first state to enact its limited liability company statute and many states quickly followed suit. Indiana adopted its limited liability company statute, known as the Indiana Business Flexibility Act, in 1993.

Most of the characteristics of a partnership are shared by the limited liability company. The company is formed upon filing articles of organization with the Secretary of State’s office; rights and responsibilities are spelled out in a written operating agreement; the interests are freely transferable (though again, the transferee does not automatically become a member in the company); and the entity itself usually does not pay any tax, although some states other than Indiana do subject limited liability companies to franchise taxes.

A major difference between a partnership and a limited liability company is that each of its members enjoys liability protection. Another major difference is that in recent years, most states have recognized limited liability companies with only one owner. This means that you can protect yourself from personal liability and yet still operate your business, in many ways, as you would a sole proprietorship (presuming you comply with the formalities of the limited liability company). These so-called “single member LLCs” offer an important tax advantage—annual information can be reported on the owner’s individual tax return, and no separate tax return or identification number is required.

A limited liability company can either be managed by its members, or the members may select one or more managers (e.g., a board of managers similar to a corporate board of directors) to run the business. Most states will require you to decide upfront how the company will be managed. All things being equal, most business owners will choose the limited liability company form over the partnership form. However, things are almost never equal and nuances do exist. It is important to discuss these details with your attorney.

The Law Office of Brian V Powers works with new and prospective business owners to aid in the purchase, structuring and formation of a new business. We also provide convenient, fixed pricing for certain business formation legal services. Contact us today at inquiries@bvplegal.com for help forming your Indiana Limited Liability Company.

Starting an LLC? 5 Reasons Why This Is a Great Idea (stepbysteptips.com)
Forming an LLC May Be a Wise Choice For Your Small Business (stepbysteptips.com)
Five Terrible Reasons You Failed To Incorporate Your Online Business (davidrisley.com)

Starting a Business – Forming a Partnership

Brian Powers — Fri, 01 May 2009 22:51:02 +0000

A partnership is an association of two or more persons to carry on as co-owners of a business for profit. This means that a partnership can often arise automatically when you and one or more co-venturers start conducting business together. In most cases, you will want to spell out the rights and obligations between you and your partners in a legal document known as a partnership agreement. For example, the partnership agreement will provide that each partner is entitled to a certain percentage of the profits and/or losses from the business.

In general, as a partner, you can sell or assign your interest in the partnership, and that transfer does not cause the partnership to dissolve. However, the transferee of your interest does not automatically become a partner. Rather, the transferee is merely entitled to a share of the profits and certain rights upon liquidation. To replace you in the partnership, that transferee must be admitted as a partner, usually by vote of the remaining partners. Interesting partnership issues can arise in the context of intellectual property protection. For example, where one partner invents certain patentable technology, absent an agreement to the contrary, it is not entirely clear whether the partnership itself is entitled to use the technology. This could potentially result in one partner having unforeseen leverage over his co-owner(s).

Nearly all partnerships are non-taxable entities; that is, while the partnership files certain tax returns, the partnership itself does not pay any federal, Indiana, or local taxes. What is more, you can typically make contributions to and take distributions from the partnership in a tax-free manner. For this reason, many business owners will choose the simplicity of the partnership form over a corporation.

A general partnership will not provide you or your partners with liability protection. Creditors can and often do look to the assets you own individually to satisfy liabilities. However, there is a special type of partnership known as a limited partnership. In this type of partnership, there are two types of partners; the general partners, who manage the affairs of the partnership, and the limited partners, who do not participate in the management. In a limited partnership, the general partners’ individual assets are subject to creditor claims, but the limited partners enjoy liability protection. Absent unusual circumstances, the most a limited partner stands to lose in the business enterprise is the partner’s capital investment.

A limited partnership is subject to a slightly higher degree of formality in that it must file a certificate of limited partnership with the Indiana Secretary of State before it can be formed.

My entrepreneurial law / start-up law practice helps clients choose the appropriate type of partnership, form partnerships, and draft partnership agreements. Contact Indianapolis business attorney Brian Powers for help with your partnership.

IndianaStartup.com » Business Types

Starting a Business – Choosing The Type of Business to Form

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