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Elkhart County and
Elkhart, IN, 46517
In the process of building your Business Plan with your SCORE mentors, you likely discussed the options for how to legally structure your business. The tax aspects, legal requirements and the potential for personal liability are important considerations that must be weighed against your desire for simplicity and an easy way to operate your business.
There are four basic types of legal entities: sole-proprietorships, partnerships, corporations and limited liability companies (“LLC”), each with its own advantages and disadvantages. An attorney who practices in the area of business law can help you understand which business structure will make the most sense for you. Consider these factors when choosing which entity is right for your business.
A sole proprietorship is a business that is owned by a single person (or by a husband and wife) that is not a corporation or an LLC. There are no legal requirements to comply with in order to create and maintain this business structure. The biggest disadvantage is that you, the business owner, are held personally liable for the debts and obligations of the business. This means that if someone sues your business and obtains a judgment against it, you will be responsible for paying it even if it exceeds the entire worth of your business. You should evaluate the potential risk of this kind of liability for your type of business to determine whether you should operate as a corporation or LLC instead.
A partnership is a business that is owned by more than one individual (not a husband and wife) that is not a corporation or LLC. Nothing is required to establish the business partnership; it happens automatically when two or more people own a business that is not a corporation or LLC. It is a good idea, however, to have a written partnership agreement which spells out the commitments of the parties, including how much and what they will contribute to the business, how they will draw profits and share losses, and who will have authority and responsibility for making various business decisions among other things. If the owners of the business do not have a written partnership agreement, state partnership laws determine the obligations of the partners. Generally speaking, each general partner is fully liable for all debts and obligations of the partnership, much like a sole-proprietorship.
A corporation is a separate legal entity and may be owned by one or more individuals. Generally, establishing a corporation involves preparing Articles of Incorporation and Bylaws and issuing stock. The Articles of Incorporation are filed with the State and a Certificate of Incorporation is issued to the business. The main advantage of operating a business as a corporation is that the owners of the corporation (shareholders) are not personally liable for the debts and obligations of the corporation. The shareholders’ exposure therefore, is limited to the shareholder’s investment in the corporation. A corporation files its own tax return and pays taxes on the business’ earnings. In some cases, the corporation and all of the shareholders may make an election (a “Subchapter S Election”) to have the profits and losses of the business passed on to its shareholders in proportion to their stock ownership, and each shareholder is then responsible for paying taxes on his share of the earnings. The biggest disadvantage is that the business must conduct shareholders and director’s meetings and take other steps to preserve the corporate status; this can be cumbersome for small businesses.
Limited Liability Company
Like a corporation, an LLC is a separate entity. Its owners are called “members”. The LLC must file its Articles of Organization with the State. A separate Operating Agreement normally spells out the duties and obligations of the LLC and all of its members. Members of an LLC, like shareholders of a corporation, are not liable for the debts or obligations of the LLC; their only exposure is the potential loss of their investment in the business. LLC’s have more flexibility in its agreements with its members than a corporation has with its shareholders. LLC’s, like Subchapter S corporations, do not pay income taxes, and all profits and losses are passed on to its members, who are responsible to pay income taxes on their share. There are also certain legal requirements which must be met to preserve the legal status of the LLC.
The choice of entity you make when you start your business does not have to be permanent. Many businesses start as a sole-proprietorship or partnership, and as the business grows, the owners may decide to change the organizational status to a corporation or an LLC.
Your Elkhart Area SCORE Chapter Can Help
Choosing a business structure is a common discussion topic in a SCORE mentoring session. The counseling is absolutely confidential and free of charge. Mentors in Goshen and Elkhart are ready to help you with this process. To set up a meeting simply click the “Request a Meeting” button. You will be directed to a listing of appointment times available.
The demand for SCORE Services is growing rapidly in Elkhart County. We need your help. If becoming a SCORE mentor or volunteer sounds interesting to you – please contact us.