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Small Business Law

Starting a business.

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Forms of Business Ownership

One of the first decisions that you will have to make as a business owner is how the company should be structured. Consult with an accountant and a lawyer to help you select the form of ownership that is right for you.

In making a choice, you will want to take into account the following:

  • Your vision regarding the size and nature of your business.
  • The business's vulnerability to lawsuits.
  • Tax implications of the different ownership structures.
  • Whether or not you need to re-invest earnings into the business.
  • Expansion of the business.
  • Sale of the business.

Sole Proprietorships


The vast majority of small businesses start out as sole proprietorships. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.


Advantages of a Sole Proprietorship

  • Easiest and least expensive form of ownership to organize.
  • Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
  • Sole proprietors receive all income generated by the business to keep or reinvest.
  • Profits from the business flow-through directly to the owner's personal tax return. The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship

  • Sole proprietors have unlimited liability and are legally responsible for all debts against the business.
  • Their business and personal assets are at risk.
  • May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
  • May have a hard time attracting high calibre employees, or those that are motivated by the opportunity to own a part of the business.


Partnerships

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners.

The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed. The partners must also decide how much time and capital each will contribute.

Advantages of a Partnership

  • Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
  • Different partners bring different skills to the enterprise.
  • With more than one owner, the ability to raise funds may be increased.
  • The profits from the business flow directly through to the partners' personal tax returns.
  • Prospective employees may be attracted to the business if given the incentive to become a partner.

Disadvantages of a Partnership

  • Partners are jointly and individually liable for the actions of the other partners.
  • Profits must be shared with others.
  • Since decisions are shared, disagreements can occur.
  • The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Corporations

A corporation is considered by law to be a legal entity or a "person", separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

Benefits of Incorporating

  • Personal Liability Protection;
    This is the number one reason why many people incorporate. In case of a lawsuit or judgment against your business, no one can seize your personal assets unless you have pledged these as collateral. There are other liabilities which you will not be able to avoid by incorporating. For example, if you do not remit certain taxes, you could be held liable as a director or officer of the company.
  • Potential Tax Advantages;
    There are more tax options available to corporations than there are to proprietorships or partnerships. You can establish various pension, profit-sharing and stock option plans which are favorable to the owners of the corporation. For example, in most cases, a corporation can deduct your life and health insurance premiums whereas you could not do this personally. You can also pay salaries to family members thereby reducing your family's overall tax burden.
  • Flexibility in Personal Financial Planning;
  • Greater Control in Transferring Ownership;
  • Easier to Bring in Outside Investors and Other Partners;
  • A Company Survives Human Death.

    Disadvantages of a Corporation

  • The process of incorporation requires more time and money than other forms of organization.

 



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