Updated: May 17, 2022
It’s the New Year: did your list of resolutions include starting a new small business? If so, congratulations on your decision. The next question is, what kind of business are you going to form? Will you choose, for example:
- A corporation?
- A limited liability corporation?
- A partnership?
- A sole proprietorship? Or,
- A franchise agreement?
The choice of business form for your new venture is an important decision but one that new business owners and inexperienced entrepreneurs may give little thought to. Choosing the wrong type of business entity can lead to:
- Significant tax consequences;
- Loss of your personal assets in the event of a lawsuit; and
- Termination of your business upon your death.
Questions to Ask When Starting a New Business
So how do you determine what type of business is right for you? It’s simple: Ask yourself the right questions:
Do I want to expose my personal assets to potential liability if my business is sued?
Only certain business entity types offer you and your personal assets protection against seizure in the event your business has a judgment entered against it. If you have significant personal assets that you cannot afford to lose – your house, your car, etc. – it is important you choose a business form that will offer you protection from personal liability. Choosing the wrong type of business can mean that a successful plaintiff in a lawsuit filed against your company can ask a court to have your personal assets sold if your business does not have the funds or assets to pay the judgment.
How important are taxes to me?
In simple business entity forms like sole proprietorships, taxes are easy: you report your business’s profits and losses on your personal income tax returns (You pay for this, however, in that you do not have protection from personal liability, as discussed above). In the case of a corporation, however, your business’s profits will be taxed once when the business realizes the profit and then again if you distribute profits from the business to yourself or other shareholders. While a sole proprietor may be able to handle his or her own tax returns, starting a corporation or similar type of business entity will almost certainly require a business lawyer’s and/or tax professional’s assistance to ensure you make the best decisions for your and your business.
Do I want my business to survive me?
Is your business going to be your legacy to your children? Will your children and grandchildren work at your business after you are gone? Or is your business more of a personal hobby or interest you have no desire to pass on to others after you die? Your choice of business entity can affect whether you are able to leave your business or your interest in a business to your heirs and/or other beneficiaries upon your death.
Assistance in Making the Right Decision
Once you have considered the relevant questions, it is time to discuss your answers with an experienced business formation lawyer. He or she will listen to your goals and your concerns and advise you of the business entity type or types available for your new venture. He or she can explain the advantages and drawbacks of each entity type so that you are fully aware of the benefits and potential liabilities you face (you will know, for example, that a sole proprietorship terminates upon your death).
Contact Patrick J. Monahan of the Monahan Law Firm, PLC for assistance in starting your new business. He will guide you through the relevant questions and considerations and help you make a wise decision regarding the form of your new business venture. He can then assist you in taking the steps necessary to officially form and start your business and will help you get your venture off to a successful and legally-sound start. Contact his office today by calling (623) 385-3190.