You want to start your own business or you have started your own business. Now what? What types of business entities are there and what is right for you.
There are different types of businesses. Depending on your state you can operate your business as sole proprietorship, Limited Liability Company, corporation, or partnership. If you own your own business and have not done any business planning, then you most likely are operating a sole proprietor.
The sole proprietor is probably the most common type of business. The problem with a sole proprietor is that you have unlimited liability. Depending upon the state you are in you may be able to form a sole member limited liability. This would allow your have limited liability. You could also form a corporation. A corporation requires that you follow certain formalities such as having officers, a board of directors, and having annual meetings for share holders and directors to elect officers and conduct business. A Limited Liability Company does not require all the formalities which make it easier to operate. A Limited Liability Company will have members. It can be run by a manager or its members. You don’t need to have annual meeting but it is probably a good idea. If there are more to owners in the company you should talk to your CPA or accountant as you will need to file tax returns for the companies. Depending on your situation you want to make an S-Election to have pass through taxation. You could also have your LLC treated as a disregarded entity for tax purposes. This makes sense for most single member LLCs. You should discuss this with your CPA. If you form a corporation you will most likely need to obtain a tax identification and pay a salary. It is a good idea to talk to your accountant and CPA as he or she will know your situation and provide the best solution or advice to you.
If there are two or more people in business then you could operate as partnership, corporation or Limited Liability Company. If you do no business planning, then most likely you are operating as a partnership. This is not good because a partner has joint and several liability with the other partners. This is not so in corporation or a limited liability company. Also, you need to plan ahead to have buy out agreement or operating agreement if you should decide to break up the company. It is better idea to plan ahead and agree on these terms instead of fight over the break up in court.
You should probably not continue to operate as partnership due to the liability issues. Most states have limited partnership or limited liability partnership acts to allow you to convert to a limited partnership or limited liability partnership to allow for some liability protection. However, limited liability companies are becoming more popular and you may want to consider just forming an LLC. It is a good idea to have an operating agreement or partnership agreement to outline how the partnership will operate and what happen if it is dissolved.
If you are considering forming a company, then you should talk to a business attorney in your state as the right type of company will depend on your situation.