You have a choice to make. You are ready to go into business, but what kind of business are you going to form? Your decision will have a significant impact on your business and should be made with the benefit of experienced legal counsel.
Starting a business involves some personal and financial risk. An attorney can help you weigh the pros and cons of your business formation options and execute all of the necessary documentation to comply with legal requirements and minimize the potential for future business disputes.
Your Business Formation Choices
The type of business entity you choose to form will depend on your plans for your company and who else is involved. Depending on your business needs, you may be able to form a(n):
A sole proprietorship is an unicorporated business that is owned and run by one person. As the simplest and most common way to start a business, there is no legal distinction between the owner and the business entity for tax or liability purposes.
Limited Liability Company (LLC).
A limited liability company may have one or more owners. It is a legally distinct entity from its owner(s), and owners are generally not personally responsible for the LLC's obligations.
General partnerships happen when two or more people decide to join together as co-owners of a business. Each partner contributes to the business and shares in its profits and losses. However, partners in general partnerships each remain personally liable for the losses of the partnership.
A limited partnership must have at least one general partner and at least one limited partner. General partners have management control. Limited partners contribute funding or services in return for a share in the business profits. Unlike general partnerships, limited partners are not personally liable for the partnership's debts.
Professional Corporation (PC).
A group of licensed professionals, such as doctors or lawyers, who want to open a joint practice, may choose to open a professional corporation. One of the most significant advantages of a professional corporation is that if one professional commits malpractice, the other professionals are not personally liable.
C corporations separate your personal assets from the business. The business becomes its own legal entity. C corporations pay business expenses, and taxes and profits are distributed to shareholders.
Like C corporations, S corporations are their own legal entities. S corporations are similar to C corporations in many ways, but there may be tax advantages for small businesses who choose to operate as S corporations. Only small businesses are eligible to become S corporations.
There are potential advantages and disadvantages to each of these types of businesses, and there are other types of businesses that may be formed in Virginia and Maryland. As an entrepreneur, you have a critical decision to make. However, whatever decision you make, you must have the required documentation to make sure your entity is legally sound.
Business Formation Documentation
The specific documentation you will need depends on what kind of business you form. Most businesses will require:
- Non-Disclosure Agreements for employees and business partners
- Option Plans
- Intellectual Property Assignments
Limited liability companies will also need:
- Articles of Organization
- Operating Agreements
Corporations will require:
- Articles of Incorporation
- Initial Meeting Minutes
- Shareholder Agreements
- Boards of Directors and Officers
- Federal Tax Identification Numbers
- IRS Form 2553, for businesses that want to become S corporations
Additionally, the right business licenses and tax forms must be filed with the government.
Investing in Legal Help Now Is a Wise Financial Decision
How you choose to form your business will have short-term and long-term impacts. Your decision could, for example, impact your growth, funding, capital, and exit strategies. An experienced business formation lawyer will take the time to thoroughly understand your current goals, future goals, expansion needs, and expected capital needs to provide you with a comprehensive understanding of your various options. Then, you can make an informed decision about how to form your business.