To incorporate or not to incorporate, that is the question. Whether it is better to LLC or privately own...oh, you get the idea.
Choosing a business model for your online enterprise is an important decision to make no matter how you look at it. And sometimes it's not easy to determine what path is the best one for you. But it may have gotten simpler. Cherry Hill-New Jersey attorney, Ron Cappuccio, created an online "determinator" last February that offers an easy to use template that narrows down those choices for you. Using his Web site http://www.taxesq.com (click on Choose the Best Legal Entity for your Business), you can enter basic information about your company and yourself that will recommend whether it is in your best interest to form a private ownership, Limited Liability Company, incorporation, or partnership.
According to Cappuccio, "except for Louisiana, there are great similarities within states" for how the different business entities function. He says the advantage of using his determinator prods the novice entrepreneur into discussing and thinking about how to form their company. "I wanted to alert people to making a choice from the beginning," he says. "If it's not set up right in the beginning, it will cost a lot more to correct the mistakes later."
Those mistakes can prove costly, both in taxes and liability. A quick look at the pros and cons of each is as follows:
Sole proprietorship:
Pros--This is the least expensive form of business to start and has the double advantage of allotting you complete control over your company and is not taxed separately.
Cons--Because the buck stops with you, so do the bills. You have to pay all debts that incur, and if the business fails it's the personal assets that get attached.
This form of business expands beyond the mom and pop run entity, employees can be hired but you will need a federal identification number. And your community may require that you register with them as a business, check with your local town hall.
Partnerships:
Pros--This is an agreement between two or more partners in a venture and should be put in writing to avoid future conflicts. This kind of arrangement allows each member to add his or her strengths to an undertaking.
Cons--Each partner is responsible for the obligations of the business and any contract made by a partner is binding for all. The death or withdrawal of a partner may jeopardize the business.
Limited Liability Companies (LLC):
Pros--Members are not exposed to being personally liable for the company or its members. Those participating in the business may be other than individuals. LLCs can include partnerships, trusts, or corporations and the number of participants is not limited. Outside management may be hired to run the company.
Cons--It is not recommended that individuals form an LLC (in some states they may be prohibited from doing so). It is more costly than a sole proprietorship and members may have to pay self-employment taxes (depending on the state where they do business).
Corporations:
Pros--The business' life extends beyond that of its inceptors. Liability is limited and extends only to the corporation's assets unless the personal assets are pledged as collateral. The corporation may be organized in any state and do business elsewhere. Earnings may be retained for future investment.
Cons--It is more complicated and expensive to form a corporation. If you do business other than the state where you incorporated, you may be subject to additional fees and taxes. You must be careful to adhere to the corporate formalities such as issuing stock certificates, annual meetings, recording the meeting minutes, and electing directors, otherwise a suit against the company may claim the shareholders personally responsible for corporation debts. Administration of a corporation is complicated and costly.
There's no need to panic if you can't decide right now. The budding entrepreneurs can opt for the least complicated form for doing business at first, changing the company's structure as you grow or expand. But no matter what you personally choose as the best way to go, talk with a tax attorney and accountant to see the pros and cons for yourself and what your community will require. Ron Cappuccio advises you choose a professional with experience working with small businesses. You can check online or contact him after using his determinator to see what's the right business path for you.
