In Part 4, I learned about a few of the internet business models that exist and the benefits of each one. But, before I could really choose a business model, I felt I needed to define the foundation of my own company.
In Part 5, I’m looking down the barrel of the most important decision I would have to make in the process of creating my Internet business- How to define my business legally?
Do legal details make you anxious? If so, you are not the only one!
If your just starting your own company, you probably have questions or even worries about how to set things up in such a way that you get the most benefits for the least money. You may wonder should you operate as a Sole Proprietorship, General Partnership, a Limited Partnership, a Corporation or an LLC. Here is the general description of each:
- Sole Proprietorship - the simplest form of business in which a sole owner and the business are not distinct entities and the owner is personally responsible for all business debts.
- General Partnership – a partnership where there are no limited partners, and each general partner has both unlimited liability for partnership debts and managerial control of the partnership.
- Limited Partnership – a limited partnership has both limited and general partners. The general partners manage the business and are liable for the debts of the business. The limited partners are each liable for the amount of money that they have invested in the business.
- Corporation- is authorized by the state to act as a legal entity distinct from it’s owners. A corporation operates under it’s own name and has it’s own legal powers making it a separate legal entity.
- S-Corporation- An “S” corporation is a corporation which elects to be taxed under the Sub chapter S of the Internal Revenue Code. An “S” corporation is generally exempt from most federal income tax because the shareholders pay tax on the corporations income through their individual tax returns.
- Limited Liability Company (LLC) – an LLC provides protection from personal liability like a corporation but the LLC receives the tax treatment of a limited partnership or a C-Corporation whichever the members prefer.
Benefits of Incorporation
When you incorporate your business, you usually gain some liability protection that you would not have if you operated as a sole proprietorship or general partnership. For example, if your sole proprietership or general partnership borrows capital and then is not able to repay, the creditor may be able to pursue your personal assets for repayment of that debt. If you operate as an LLC or corporation, the creditor may be limited legally and may not be able to get repayment from the company. There are some case where the creditor may pursue management for repayment, but in general, more protection is afforded to a business that is an LLC or corporation. A second benefit to being incorporated is the substantial tax savings for your business. Depending on the tax laws of the home state of the corporation, there may be tax incentives and benefits such as deductions on specific business expenses.
Higher Fees For Incorporation
One of the consequences of setting up an LLC or corporation is there may be more fees per year to run a corporation. In Massachusetts, for example, you must pay a $456 license fee for the corporation and $109 to file the annual report. You may also increase your personal property taxes and increase the cost of filing your tax returns. The owner(s) of the corporation must be on the company payroll and this will cost in the range of $400 of unemployment tax.
Consult An Attorney
You can set up a corporation or LLC yourself. Simply go to your state’s web page and follow the directions. Although the setup isn’t difficult, it may be wise to consult your attorney first, so that you can determine what liability protection you want to achieve and which entity serves your purpose best. Then, you can hire your attorney to do it for you or do it yourself. It is also important to mention that there are some advantages to incorporate out of state. A lawyer can help you determine which state to incorporate in based on the nature of your business.
More about naming companies in Part 6 -coming soon!
