Form Of Ownership

Form of Ownership

The form of business ownership you choose will have long-term consequences, and requires careful consideration. You should discus this subject with an attorney familiar with new business start-ups and/or with your accountant. I recommended you get a book on the subject, and study up on the advantages, and disadvantages of each form of ownership. Your decision should be based on the particular needs of the business, and your personal situation.

Most small businesses (about 75%) operate as sole proprietorships, or partnerships using a DBA (doing business as) certificate from their county court house. The ease of setting up a sole proprietorship makes it the popular choice. Sole proprietorships are inexpensive to set up and any losses help reduce your earned income from other sources.

In your business plan a statement that the business will operate, as a sole proprietorship is all that is needed. Include the statement in the management, or executive summary section. For Other forms of doing business an explanatory statement, and copy of the corporate charter, or partnership agreement should be included with the business plan.

Sole Proprietorships.

Register your DBA at the county court house, and get any needed licenses, or permits, and you are ready to go. This is your simplest, and lowest cost form of doing business. Note: Carry liability insurance to get rid of the liability worry. All losses, profits, and tax liability, pass through to the owner.

Partnerships.

Setting up a partnership is the same as a sole proprietorship, with the exception that the formal partnership agreement should be prepared by an attorney, and possibly recorded. The Partnership files a tax return, and each partner's share of any losses, or profits, pass through to the partners. The operation of the business is governed by the written agreement between the partners, thus the agreement should be written with do care and foresight.

Limited Partnerships.

Limited partnerships are used to raise capital, with one person (or an entity) acting as the general partner. General partners have full liability, and the limited partners act as silent partners, with no say in management. The limited partner's liability, is limited to the amount invested. There is a tax advantage to the limited partners. Both your attorney, and account should prepare the formal agreement, as there are both legal issues, and tax laws to be concerned with.

Corporation.

A corporation is an entity, and as such becomes the employer, and files a tax return. A Corporation is regulated under state law, and chartered by the secretary of state. When choosing to operate as a corporation there will be decisions to be made as to the state of incorporation, taxation, liability, stock issuance, accounting methods, record keeping, and other issues. You will want to consult with your attorney, and your accountant before deciding on this form of ownership, they will help you decide which type of corporation to use. A board of directors, elected by the shareholders governs the corporation.

There are advantages, and disadvantages to operating as a corporation, and you should have a thorough understanding of both. The most common advantages that new business owners' state as a reason to form a corporation has to do with liability, both as to legal liability, or financial liability. In most every case a new corporation will find that the major stockholders will have to personally guaranty all loans, and vender purchases making you personally liable. In almost every case if your corporation is sued, you as members of the board or officers of the corporation, will be sued individually also.

Limited Liability Company (LLC)

Chartered under state law, a limited liability company has the limited personal liability of a corporation, with the tax advantages of a partnership. An LLC is a tax reporting entity, but not a tax paying entity (check the IRS rules on reporting before forming your LLC). There are state laws, and federal rules governing LLC's, and your attorney, and tax accountant should advice you as to how to proceed.

Business Plan Example.Â

J Johnny Q's Barbecue restaurant will operate as a sole proprietorship.