Watch and Listen to What Co-founder Attorney Robert Shapiro Has to Say About A Company That Helps You File The Paper Work You Need to Start A Business. You May Remember Robert Shapiro from the famous O.J. Simpson Trial.

When starting a new business, one of the first decisions to be made is deciding which legal structure  your company should take.  

You have 4 basic choices:
 

2. A Partnership

2. A Limited Liability Company (LLC)

 Sole Proprietorship

A Sole Proprietorship (also known as a "DBA" - Doing Business As , or a "fictitious name") is a business with one owner. A business organized as a sole proprietorship is not separate from its owner, merely a different name that the business owner operates under. The owner is personally liable for the company and its debt; all income is added on the owner's personal tax returns (pass-through taxation).

PROS: Easy to setup, easy to maintain.

CONS: Owners are personally liable for the company and its debt ( you could lose your house, cars, personal assets, etc.) in a lawsuit.  Usually not recognized at the State level, only in your city/county. No corporate "prestige" of having the "Inc." or "LLC" attached to your name.

How to get Started: Prepare and file a DBA application at the city or county where you intend to do business.  Click here to file your DBA online .

 Partnership

A Partnership is essentially the same as a Sole Proprietorship, except there is more than one person involved. The owners are personally liable for the company and its debt, income is distributed equally and is added on each owner's personal tax returns. Sometimes the partners will enter into a "partnership agreement" that details ownership and responsibilty.

PROS: Easy to setup, relatively easy to maintain.

CONS: Each partner is personally liable for the company and its debt.  Disputes, ownership issues and disagreements not addressed by a partnership agreement can be difficult to remedy.

How to Get Started: Typically the same filing process as a Sole Proprietorship: click here to file your DBA online.

 Limited Liability Company (LLC)

A Limited Liability Company can be best described as a hybrid between a corporation and a partnership. It provides easy management and "pass-through" taxation (profits and losses are added to the owner(s) personal tax returns) like a Sole Proprietorship/Partnership, with the liability protection of a Corporation. It's a relatively new form of business created about 20 years ago and now recognized in all 50 States and D.C.

Like a corporation, it is a separate legal entity; unlike a corporation, there is no stock and there are fewer formalities.  The owners of an LLC are called "Members", instead of "Shareholders". So in essence, it's a like a corporation, with less complicated taxation and stock formalities.

The heart of a Limited Liability Company is known as the "Operating Agreement". This document sets the rules for operating the company and can be modified as the business grows and changes.

Operating an LLC is less formal than a corporation, usually only requiring an Annual Member's Meeting and ratifying changes to the Operating Agreement.

PROS: Provides the liability protection of a corporation without the corporate formalities (Board Meetings, Shareholder Meetings, minutes, etc.) and extra levels of management (Shareholders, Directors, Officers). Taxed the same as a Sole Proprietorship (1 Member LLC)  or Partnership (2 or more Members).

CONS: Usually more expensive to form than a Sole Proprietorship or Partnership, requires more paperwork and formal behavior.

The Lowdown: The Entity of Choice for 1-5 person startups, has recently surpassed Corporations in popularity.  Easy management and limited compliance requirements have made the LLC the user-friendly solution for small business.

How to Get Started: You can start right now.  Form your LLC in any of the 50 States and D.C.  

Corporation (or C Corporation)

A Corporation is a separate legal entity that can shield the owners from personal liability and company debts. As a separate entity, it can buy real estate, enter into contracts, sue and be sued completely separately from its owners. Also, money can be raised easier via the sale of stock; its ownership can be transferred via the transfer of stock; the duration of the corporation is perpetual (the business can continue regardless of ownership);and the tax advantages can be considerable (i.e. you are able to deduct many business expenses, healthcare programs, etc. that other legal entities are not). Income is reported completely separate via a tax return for the corporation.

A corporation is set up in this structure:

1. Shareholders Own the Stock of the Corporation
2. Shareholders Elect Directors (known as the "Board of Directors")
3. Directors Appoint Officers (President, Secretary, Treasurer, etc.)
4. Officers run the Company (day-to-day operations)

In many cases (especially during the startup phase), you will be the 100% owner of the stock, therefore you elect the directors (usually yourself) and then appoint yourself as an officer (or all the officers: CEO, Treasurer, Secretary).

The rules for operating your Corporation are set in what are called Corporate By-Laws. This document sets the rules for the company and can be modified as the business grows and changes.

Operating a Corporation involves at the minimum holding a yearly Directors and Shareholders meeting (the location is determined by you and the expenses are deductible), keeping written Minutes of major company decisions and maintaining general Corporate Compliance as dictated by the Corporate By-laws.

PROS: The oldest, most successful and most prestigious type of business entity; provides personal liability protection; conveys permanence, can reduce taxes (lower tax rate on retained profits, items like healthcare, travel and entertainment are deductible).

CONS: More expensive to setup than a Sole Proprietorship or Partnership; more paperwork and formality required than an LLC (holding Board meetings, keeping minutes and resolutions).

The Lowdown: Though more complicated to run and manage than the LLC, the Corporation is still the oldest and most prestigious form of entity.  C Corporations are taxed at a lower rate on profits and are able to deduct items like healthcare, travel, entertainment, etc. that LLC's and S Corporations cannot.  More complicated tax and management issues than an "S Corporation".

How to Get Started: You can start right now.  Form your Corporation in any of the 50 States and D.C.

The S-Corporation (or Small Business Corporation)

After a corporation has been formed, it may elect "S Corporation Status" by adopting an appropriate resolution and completing and submitting a form to the Internal Revenue Service (some states require their own version). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than a corporation. Thus, the income is "passed-through" to the shareholders for purposes of computing tax returns.

Most new small corporations elect S-Corporation Status (90%+) so profits and losses can be added to the shareholders personal tax returns without having to pay taxes on profits once, then again when they are given back to the shareholders as income (dividends). This is known as "double taxation" and is the reason why S-Corporations were created. An S-Corporation can also revert back to regular Corporation status fairly easily.  

There are some limitations on S-Corporations: they cannot deduct some expenses like health insurance, travel, entertainment, etc. that normal corporations can. Also, they are restricted to 75 shareholders or fewer and those shareholders must be U.S. Citizens.

PROS: Prestige of the Corporation without the double taxation.  Ideal for "1 person corporations".

CONS: More expensive to setup than a Sole Proprietorship or Partnership; more paperwork and formality required than an LLC (holding Board meetings, keeping minutes and resolutions).

The Lowdown: Though taxed in a similar manner to LLC's, still requires the corporate formalities of a regular Corporation (Shareholders, Officers, Directors & Board/Shareholder meeting, minutes, etc.)

How to Get Started: You can start right now.  Form your Corporation in any of the 50 States and D.C.  Also prepare the IRS Form for your corporation to elect "S Corporation Status".

One of the unique features of incorporating or forming an LLC (as opposed to a sole proprietorship or partnership) is that you do not necessarily have to form the company in the State where you do business.

When deciding on which State to incorporate in, there are basically 2 choices:

1. Incorporate or Form an LLC in Your Home State
2.Incorporate or Form an LLC in Delaware or Nevada
 

For the majority of small businesses, incorporating or forming an LLC in your home state is usually the easiest and least expensive option.  This is because virtually every State has laws that require you to "re-register" a Delaware or Nevada company in the state where it is actually doing business.

For example, if you form a Nevada Corporation but your physical business is located in Colorado, the State of Colorado will want you to "re-register" as what's called a "foreign corporation" (a company that was not originally incorporated in Colorado).

In most cases, registering as a "foreign corporation" or LLC will subject you to all the same taxes and fees as an in-State company.  So, in essence, you will probably have not avoided any taxes or fees, plus there is the added expense of registering as a "foreign corporation" in your home State.

This is not to say there are not valid reasons for choosing another State, we just like our potential clients to be aware of the additional steps required when choosing a State outside of their home State.

Delaware or Nevada

For some small businesses, incorporating in one of the "business-friendly" States may be advisable (we always urge you to speak with an attorney or accountant if you are unsure).  

Delaware

Delaware is where most large corporations (Fortune 500, Nasdaq, etc.) are incorporated.  The reason for this is that Delaware's body of law is more business-oriented and they have a large and advanced business court system to handle complex legal litigation.  It is the State of choice for both large corporations, foreign corporations and many fast-growing or high-potential companies.

Nevada

1.  Prestige: a Nevada or Delaware entity is the chosen business entity of the largest, most successful and fastest growing companies in the world.

2.  Protection: predatory consumers or lawyers who attempt to threaten companies may be more hesitant to deal with a Nevada or Delaware company knowing that the body of law protecting the company may be more business friendly and protect the owners/shareholders more effectively.

3.  Convenience: in some cases, a business may find itself moving from State to State or having partners all over the country.  In this case, some businesses find it easier to simply use a Nevada or Delaware entity as a sort of "headquarters" that maintains the company while it moves or expands to other States.  This can be easier than continuously creating and dissolving in-state companies (and changing Tax ID Numbers, Registered Agent addresses, losing company credit profiles, etc.)

4. High Growth or High Risk Company: if your company is fast-growing or engaged in a risky industry (such as fireworks or children's toys), then Nevada or Delaware may provide the liability protection you need.  Also, if your company is fast-growing, choosing Nevada or Delaware now may prevent you from needing to inevitably re-incorporate there in the future when your company needs to go public or receive venture funding, etc.