Jul 18

Key Considerations When Starting a Business

So you’ve decided to open your own business. Making the decision is the first step. Now you need to figure out how to form your business.

You’ll have to address everything from your business name to how your operation will be set up, i.e., sole proprietorship, limited liability company or corporation. Your choice will have differing legal and tax ramifications.

That’s why it’s important to contact a qualified business and tax attorney who can explain the legal and tax differences for each business type.

  1. Naming Your Business
    When choosing a business name, the first step is to go to the Secretary of State business records in the state where the business will operate to find out if the name is available. Next, do some research with the federal patent and trademark office to confirm the name is not registered. Finally, search a domain name registry to see if the URL name you want to use for your website is available.
  2. Forming Your Business
    There are several options for forming your business. For the purposes of this blog, we will only discuss the following:
    • Sole Proprietorship: If you form your business by simply registering a tradename or fictitious name then you are operating as a sole proprietorship. This means that your business is not legally separated from you. Thus, your company’s creditors can make claims against your personal assets.

      The income and expenses from your business must be included on your personal tax return using a Schedule C and you’ll have to pay income tax and self-employment tax on all your annual business earnings.

    • Limited Liability Company or LLC: An LLC is a legal entity separate from its owner. The owners of an LLC are called members. Unlike sole proprietors, creditors of the business, in most cases, can’t make claims against a member’s personal assets.

      If the LLC has one member, it is taxed the same as a sole proprietorship. If there are two or more members, it will be taxed as a partnership and an annual partnership tax return must be filed. Members of an LLC can choose to have the business taxed as a corporation or S Corporation. Like sole proprietors, the members of an LLC that is taxed as a partnership are considered to be self-employed; therefore they don’t get W-2 wages.

    • Corporation: Like the LLC, a corporation is a legal entity separate from its owners. Its owners are called shareholders. The creditors of the corporation, in most cases, cannot make claims against the shareholder’s personal assets.

      A corporation, no matter its size, must follow the corporate recordkeeping formalities set forth in the statute of the state where incorporated. These include holding annual shareholder meetings, electing a board of directors and corporate officers, keeping detailed records of meetings and providing annual financial reports to shareholders.

      A corporation files its own tax return and pays the taxes imposed on its income. The shareholders can be employees and receive W-2 wages or they can be paid dividends.

    • S Corporation: The S Corporation is an election that is filed with the Internal Revenue Service. The S Corp election is only available to small businesses. The election can be made by an LLC or a corporation. There are both advantages and disadvantages to making this election.

How you choose to organize your business will vary based on individual needs, goals and tax implications. It’s possible to begin your business as an LLC and later legally reorganize the business into a corporation and/or elect a different type of tax treatment. Your attorney can assist you in deciding what works best for you.

Note: The above is not intended to be legal or tax advice. You should always contact an attorney and tax professional before making decisions that affect your business,

Disclaimer: This is intended to provide useful tips and is NOT intended to be legal advice. You should always seek the advice of an attorney when creating a will. You can also get more information about creating a will by contacting one of the attorneys at Brunsdon Law Firm.

No comments yet.

Leave a Comment

thirteen + 16 =