Business Structure. The first thing to consider when forming a business is what type of business entity to use. Below is an extremely abbreviated description of the entity choices. Contact me if you would like a more detailed list. I typically recommend a 3-way conversation between a new business owner, the lawyer, and the accountant when deciding on business structure.
Sole Proprietor/General Partnership. One person in business without an entity is a sole proprietor, and more than one person in business without an entity is a general partnership. Typically, a sole proprietorship is only appropriate for simple businesses with a very low risk of liability. I typically recommend against general partnerships because, in most circumstances, a limited liability company is a better vehicle.
Corporation. The owners of a corporation are not usually liable for the corporation’s debts. There are different tax structures for corporations depending on whether the corporation is a “C” corporation or an “S” corporation.
Limited Liability Company. The owners of a limited liability company are not usually liable for the limited liability company’s debts. Limited liability companies have pass-through taxation. Depending on the particulars of your business, sometimes for tax reasons it makes more sense to have an “S” corporation rather than a limited liability company. However, limited liability companies are simpler to maintain than corporations.
Funding. The next thing to consider is how you will fund your business. If you are funding your business with “sweat equity” you should consider the tax implications of that choice. If you are investing your own cash, you should consider whether you should contribute the cash in exchange for your ownership interest or loan the cash in exchange for a note. If you are accepting investments from others, you must decide whether those others are receiving an ownership interest and, if so, how much decision-making power the investors will have. In addition you may have to consider securities laws.
Entity Documentation. Depending on your entity choice, if you do not have any business partners, your documentation may be extremely simple. However, if you do have a business partner, you want to make certain that all of your agreements regarding the business, business decision-making, and what happens if you disagree, is in writing and thought out in advance of starting the business. Furthermore, your entity documentation can act as a “prenuptial” agreement with your business partners in the event of a business “divorce.”
Exit Strategy. How long do you want to run the business, and how do you want to “retire?” Are you building the business to sell it? What if you have to unexpectedly quit working? If something were to happen to you, would your business have any value to your children? If not, you should consider life insurance or other ways of securing assets for your children's future.
Business Documentation. Do you sell to your customers on credit? What are your payment terms? How will you collect your accounts receivable? It is best practice to have a written contract. What types of disputes are you likely to have with your clients? How can you prevent those disputes? How can you incorporate preventative measures into your documentation?
