THE BASICS TO FORMING YOUR OWN COMPANY

STARTING A PROFITABLE BUSINESS WITH A LEGAL STRUCTURE TAILORED TO YOUR BUSINESS TYPE.

BY BRYSON DAVIS PHOTOGRAPHY JAMAAL HALE

Examples of pass-through entities include sole proprietorships, partnerships, and S corporations. LLCs are also pass-through unless another election is made.

On the other hand, a non-pass-through entity is a business structure where the business itself is taxed as a separate entity. The company itself pays a tax on profits before they are distributed to the owners who may also have a separate tax to pay. C corporations are non-pass-through entities.

Tax structure and tax rates vary by business which could strongly favor one structure over another. Talking to your CPA or attorney about entity choice and tax minimization beforehand can help you keep as much money as possible.

the rights and responsibilities of the owners of the company, provide a roadmap for the management and operation of the business, and outline a procedure to follow if there is an impasse or a dispute between owners. These documents are especially important for multi-owner companies and well-drafted governance documents can help prevent costly litigation if there is ever a dispute between owners.

Contracts

Starting a business can be a liberating and profitable experience, even more so if your legal structure is tailored to your business. There are many important steps and considerations to keep in mind when forming a business, among those are choosing the right legal structure, preparing good governance documents, and having solid contracts. This article will provide a basic overview of some of the important legal checkboxes for entrepreneurs starting their business.

Choosing the Right Legal Structure

The varying types of entities are taxed differently and do not provide the same level of protection for your personal assets from the debts and liabilities of the business. A key tax distinction to know is “pass-through” vs. “non-pass-through” entities. A pass-through entity is where the profits of the business “pass through” to the owners and are reported on the owner’s personal tax returns. The business itself is not taxed, but the owners pay taxes on their share of the business’s profits.

In addition to taxes, one of the main benefits of legal entities (entities that you must register with the secretary of state) like limited liability companies (LLCs) and corporations is liability protection. Forming an entity to own and run your business can shield your personal assets, such as your home and savings, from being seized to pay business debts or legal judgments against the business. Without liability protection you can also be personally liable for your business partner’s mistakes. Filing an “assumed business name” or “doing business as” for business is not the same as a legal entity and will not provide any liability protection. Just forming the company by itself isn’t enough, however. Make sure to follow corporate formalities, keep personal and business finances separate, and comply with all laws and regulations as well to prevent a future plaintiff from “piercing the veil.”

Governance Documents

For any legal entity, there are standard governance documents that outline the internal rules and regulations of the company. Corporations have “bylaws”, partnerships have “partnership agreements” and LLCs have “operating agreements.” There may also be other agreements which govern the relationship between the owners like “buy-sell agreements” and “shareholder agreements.” These documents set forth

One of the best rules that you can follow as a business owner is to always document your transactions in written contracts. The main purpose of a contract is to clearly outline what each party is supposed to do to and how problems are addressed if the unexpected arises. Businesses should have good contract forms for transactions that they engage in often. They can be the difference between recovery and nonrecovery if you have a delinquent client. If you need a contract drafted or have questions about one that you are presented with, be sure to contact an attorney to help you.

Understanding the legal basics and having good professional advice when forming a business is essential for entrepreneurs who want to build a successful and sustainable enterprise. The legal aspects of starting a business can be complex, not to mention the myriad of other legal issues not included in this article. By taking the time to familiarize yourself with the key considerations and seeking professional advice when needed, you can ensure that you get the most from your business.

DISCLAIMER: The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this article are for general informational purposes only. Please contact your attorney to obtain advice with respect to any particular legal matter.