The decision to start your own business is not one that should be entered into lightly. There are several options to consider when deciding which type of business you should establish. For example, you may be a sole proprietorship, a partnership, a corporation, or a limited liability company (“LLC”). Choosing the right business entity can help you make the most money while protecting you from exposure to debts and liabilities. The following factors will help determine the type of business that best meets a particular business owner’s needs.
The type of business structure you should choose depends largely on the type of goods or services the business provides. If your business has a certain degree of risk associated with it, it would be wise to form either a corporation or a LLC because they provide personal liability protection. Establishing your business as a separate entity differentiates your personal assets from your business assets. If your business fails and you do not have sufficient liability protection, you could lose your entire life’s savings and incur significant personal debt.
There are no costs associated with setting up a sole proprietorship or partnership. In addition, you are not required to file any paperwork to start your business. However, LLCs and corporations tend to be more expensive to set up and maintain. Fees to file documents with the state in which you form an LLC or corporation can range from $40 to $800. If you are starting a business on a limited budget, you may want to consider a sole proprietorship or a partnership as they are the simplest types of businesses to start.
Owners of sole proprietorships, partnerships, and LLCs must report their profits and losses on their personal income tax returns and pay taxes on all net profits of the business. These business types are considered “pass-through” tax entities, which means that the profits and the losses pass through the business to the owner. The owners must then report their share of the profits on their personal tax returns. Owners of corporations only pay taxes on profits they receive from their salaries, bonuses, and dividends.
If you form a corporation, it allows your business to sell stock, which attracts potential investors. However, if you have no intention of going public, forming a corporation may not be the best way to go. LLCs are simpler and more flexible, while also providing the same liability protection as corporations.
Once you have established your business entity, you may be required to adopt bylaws and conduct regular meetings. If the business has multiple owners, it is recommended that they enter into a shareholder agreement, operating agreement, or partnership agreement. As your business grows, or your risk of personal liability increases, you can change the formation of your business entity. For example, if you start out as a sole proprietorship, you can convert to an LLC or a corporation if circumstances warrant the change.
If you are starting your own business and require guidance in choosing and/or setting up the right business entity, the New Jersey corporate compliance lawyers at Nicoll Davis & Spinella will provide you with the information and services you need in order to achieve your business objectives. Our dedicated Outside General Counsel™ engagement offers solutions to address the unique needs of your business and provide strategic legal counsel that will help you make the smartest choice for your business. For a confidential consultation, call us at 201-712-1616 or contact us online. Our offices are located in Paramus, New Jersey, Philadelphia, and New York City.