Business Law: Uncover the Stories Behind Business Entities
By Nina L. Kaufman, Esq
You've felt that glimmer of the
Divine impulse - that insistent idea whispering in your ear saying:
"start a business . . . start a business . . . ." You have
experience in your field. You've done your homework on determining
the right clients for you, where you'd want to locate the business,
who you might need to help you with it. And then you run headlong
into that first real stumper of a question - like going 90 miles an
hour into a brick wall - "what form of business will you choose?"
You start to read the websites and literature. You start to feel a
little queasy with terms like "entity-level taxation" and
"limitations of liability." By the time you get to "transfer of
ownership interest," your head is spinning and you feel like you
need a good, stiff drink (or a vacation). I don't mean to downplay
these considerations, some of which I outlined in my article, "How
to Choose the Business Structure that's Right for You." That's why
you'll want to have attorneys and accountants on your team to
translate the mumbo-jumbo into English.
But sometimes it helps if you can see yourself in the picture. So
let's look at the forms of business from a different perspective:
the owners who use them.
* Amelia, Sole Proprietor. Amelia has been a business and life coach
to individuals for the past 5 years. She handles all of her clients
via telephone sessions, which means that she doesn't have people
coming in and out of her home office. She enjoys the interaction
with people, but also the freedom to work from home. She rents no
office space, and does not need to invest large sums of money in
equipment to make her business run. She had no major financial
obligations that she needs to secure on behalf of the business. As
Amelia is not a licensed professional dispensing advice, her
exposure to liability is relatively limited (and she covers it with
insurance). Therefore, the simplicity and cost (or lack thereof) of
a sole proprietorship meets Amelia's needs.
* Brad and Belinda, General Partners. Brad and Belinda have just
started a law practice, and so far, it's just the two of them. Like
Amelia, their initial expenses are relatively low. But as there is
more than one owner for the business, they couldn't be a sole
proprietorship. They can do most of their work online, so don't need
to invest in building a library of books for the firm. They operate
out of shared office space which is already furnished, so they have
no construction costs or responsibilities. Legally, they cannot use
a business entity to shield themselves from personal liability for
wrongful advice (they cover that through malpractice insurance), so
they decided to wait to form one. Instead, they have filed a
Business Certificate for Partners with the local county clerk's
office.
* Corinne, Caleb, and Celine, S
Corporation (S-Corp) Shareholders. Corinne and Caleb started their
pest control business in 1988. They were "inspired" to do so by the
rodent problems they had in their tenement apartment when they were
first married. They chose an S-Corp form because it was simple.
Also, although they have grown the company to include a number of
employees, Corinne and Caleb controlled the management of the
company by themselves. When their daughter, Celine, showed an
interest in the business, they were delighted to bring her on as an
owner and "share the wealth." As equal shareholders in the
management of the company, they each receive an equal share of the
profits.
* Doreen and Dexter, Limited Liability Company Members. Doreen and
Dexter are the active owners of Command Control Center LLC. They
provide contract security personnel as well as database technicians
who make sure that companies' computer networks are properly
secured. In addition to Doreen and Dexter, there are a handful of
angel investors who have provided funding to get the company up and
running. However, the "angels" did not want to be involved with the
day-to-day running of the company. As a result, Doreen and Dexter
control 80% of the management decisions of the company, but - to
compensate the investors -- receive only 40% of the profits.
* Eleanor, C Corporation (C-Corp) Entrepreneur. Eleanor always
thought big, even as a child. So when she was inspired to start a
cosmetics company that served the needs of women of color and that
used eco-friendly ingredients, she was not about to keep her idea to
herself. She wanted this to go nationwide. She wanted to start a
movement. After formulating her business plan, she realized that, at
some point, she would want the company to "go public," that is, to
have its stock traded on a national exchange. Therefore, she chose
to operate as a C Corporation based in Delaware, as that was (and
is) the form most attractive to investors when taking a company
public.
These aren't hard and fast rules, but hopefully, they've "fleshed
out" the picture of business ownership a bit. Your advisors can give
you clear guidance about which form fits your needs best.
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© 2004-2009 The Legal Edge LLC. Nina L.
Kaufman, Esq. is an award-winning business attorney, author,
and speaker. Under her Ask The Business Lawyer umbrella,
Nina offers easy-to-understand business law resources that
protect small businesses and save them money. To learn more,
and receive our FREE "LexAppeal" ezine, visit
http://www.GreatBusinessLawTips.com or contact
Contact Us. This article is for your
general information only. Be sure to consult with an
attorney regarding your particular situation to make sure
you get the specific advice you need.
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Nina Kaufman, Esq.
Award Winning Business Lawyer, Author & Speaker |
