Forming a business is a momentous event in the life of any entrepreneur. The choices you make and the work you do now can set you up for success in the future. There are numerous implications of your decisions at the outset of your business. These decisions can determine how your business is run and the tax situation you may face. You should never make these decisions in a vacuum without complete information about the ramifications.

In addition, you should not attempt to draft these documents on your own using forms you may find on the internet. Always consult a business lawyer for guidance on all the legal steps you must take to form your business.

Your business attorney can partner with you and other owners to provide valuable legal advice necessary to get your company off to the best start possible. In addition, your corporate lawyer’s work can set you up for success by helping you with the legal infrastructure you need for your business. They will look ahead to anticipate where your business may be in the future and what your legal needs are. Always contact a Tacoma business lawyer to learn about their services before starting your company. Errors in the first stages can be costly and difficult to overcome, so it’s always best to have legal counsel from the very start. 

You must know about the various types of corporate structures and what they may mean for your business in the future. If you do not understand the various business forms, you may even find yourself personally liable in the future if something goes wrong. You may choose the following corporate forms for your new business.

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Limited Liability Corporations

A limited liability corporation (LLC) is a very popular corporate form for entrepreneurs just beginning their business. An LLC provides you with many advantages while also providing you with simplicity and flexibility. One of the main benefits of an LLC is that it shields from personal liability should anything go wrong. Only the assets of the LLC will be at stake in a lawsuit unless a plaintiff can somehow manage to pierce the corporate veil.

You have flexibility in how you run your LLC. However, you should memorialize the terms of the business in the operating agreement that sets forth the relationship between the members of the LLC. Doing so greatly minimizes the chances of owner disputes later on. Your business attorney can draft your operating agreement as part of the formation process.

The operating agreement may cover things like:

• The ownership interest of each member of the LLC
• How the members will divide the profits of the LLC
• How the LLC is to be managed
• The roles and responsibilities of the members
• How disputes are to be resolved among the members
• The voting power of each of the members
• How the members will make decisions for the LLC

An LLC offers many advantages, including a favorable tax structure (pass-through tax treatment that avoids the possibility of double taxation) and a less formal structure. You can customize your own business arrangement in the operating agreement. However, it takes some work to draft the proper operating agreement, on which each member may agree. Nonetheless, there is a reason why LLCs are a popular choice among entrepreneurs who are beginning a business.

Partnerships

Partnerships are a much simpler way to begin your business, as there are no formal filing requirements with the state. Here, two or more people simply agree to combine efforts, start doingbusiness togather, and share in the profits and losses of the business venture. There are three primary types of partnerships:

• General Partnerships – Each partner equally shares the profits and losses of the venture.
• Limited Partnerships—There are two classes of partners. General partners may be personally liable for the partnership’s debts, while limited partners passively invest in the venture and are not personally liable for debts.
• Incorporated Limited Partnerships – This structure is similar to the limited partnership, except that it has a separate legal identity from the partners.

There are some legal risks to a partnership. Each member may legally bind the other if you have a standard partnership. You might face personal liability because of a decision the other partner made with which you did not agree. In addition, there is always a chance that the partnership may dissolve completely if each partner cannot agree on a key decision. You may consider drafting a durable partnership agreement that allows the business to survive, even when all of the members do not agree. In addition, you should consider including a robust dispute resolution mechanism in the partnership agreement to reduce the chances of litigation among the partners. You can consider a limited liability partnership to protect the individual partners from financial responsibility if something goes wrong.

However, a partnership allows people with different skills and resources to come together to form a business. The hope is that the combination of the expertise and funds that the partners bring to the table can lead to a successful venture. The partnership agreement can often determine the success of the partnership because it will provide the operating framework.

Sole Proprietorship

In a sole proprietorship, there is no distinction between the business and the owner. There is one single owner, and they are also the business. A sole proprietorship is a simple way to easily get your business off the ground. The business is neither registered nor incorporated, so you do not have to worry about any such legal obligations accompanying this type of business form.

However, a sole proprietorship should only be the beginning point for you. It is often not enough for businesses to run long-term with ample protections for owners. There are numerous risks and drawbacks to a sole proprietorship that should leave you hesitant to use this type of business arrangement for any extended period of time.

Since you are the same legal entity as the business, you have absolutely no protection from liability should you go out of business or injure someone. You will be personally liable for any debts the business incurs. You can also struggle to raise capital since you cannot sell any stock.

S Corporation

The S corporation refers to how the business owners are taxed under federal law. Here, you are making an election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Under this section of federal tax laws, the corporation itself does not have to pay any income tax. The business’ income is taxed when the income is distributed to the owners. Then, they will pay individual income tax on their earnings. In this way, an S Corporation is considered a pass-through entity. If there are 100 shareholders or fewer, the S corporation will be taxed like a partnership with all the projections of a corporation. There is further tax protection because those working for an S corporation are considered employees and do not need to pay self-employment taxes.

You first need to incorporate your business with the state. To make your business an S corporation, you must make the election with the IRS by filing Form 2553.

There are some drawbacks to an S corporation. You lose the flexibility about how you pay the owners of the corporation. They must be paid profits in exact proportion to their ownership in the company. Although there may be voting and non-voting shares, you are restricted to just one class of stock. In addition, your S corporation might draw scrutiny from the IRS, so you should make sure to also have a tax attorney helping you as your business gets underway and grows.

C Corporation

A C corporation is different from an S corporation because there is no pass-through taxation. The corporation itself will pay taxes on its earnings, and the shareholders will also pay taxes on their dividends and distributions that they receive from the company. Even though C corporations may not have as favorable tax treatment, there are reasons why companies may want to choose this form. It is easier to raise capital from outside investors when you have a C corporation because you have the flexibility to issue different types of capital and stock. In addition, the corporation’s officers will have the same protection from liability that you have in other types of corporations.

To establish a C corporation, you must first incorporate the business with the state. Then, you notify the IRS of your tax election by filing a form. If your business reaches a certain number of shareholders, you must file reports with the Securities and Exchange Commission. In addition, you must follow certain administrative requirements, such as a minimum of one shareholder meeting per year and minutes being made available. C corporations must pay employment and Social Security taxes.

You must carefully choose whether to incorporate as a C or S corporation. There are definite ramifications on your tax situation and how your business may be run.

What to Consider When Choosing the Right Corporate Form for Your Business

There are many different pieces to the puzzle when you are starting a business. While you want a corporate structure that can help you get your business off the ground effectively, you also must consider where you want to be in the future. You should also understand the relationship between the different members or partners of your business and anticipate what can go wrong in the future in light of the business that you are starting. While it may seem pessimistic to plan around the possibility of conflicts or difficulties in the future, it is exactly what you have to do to prevent difficulties and disagreements from sinking your business. It is simply smart planning.

You must also consider your financial situation and what form you anticipate your business will take in the future. Specifically, you should think about the following:

• How easy it may be to establish your business (easy does not always mean good, but you also may not want to expend too much effort when you have other tasks to accomplish)
• How many owners you anticipate having in the future
• Whether and when you intend to raise capital from outside investors
• Whether you have significant personal assets that you want to protect from liability
• Whether you want to use equity to attract employers and partners to your business
• How you want any disputes with fellow partners or business owners to be handled
• Whether you want your business to have a permanent and unending life or should be wrapped up if certain circumstances arise

A corporate attorney can point out relevant things for you to consider and explain the pros and cons of each approach for your business.

How a Corporate Lawyer Can Help Your Business

When you hire a corporate lawyer to help your business, they can do the following:

• Listen to you and get to know your business goals
• Advise on the appropriate corporate form for your business after explaining the legal pros and cons of each
• Draft the necessary documents to begin your business
• File the documents with the necessary state offices
• Anticipate and advise on compliance issues you may need to deal with in the future
• Anticipate what your legal needs may be after beginning your business and put protections in place

You should contact a corporate lawyer at the very outset of the business formation process. A full-service business attorney can provide you ongoing legal services to address any legal issues arising when beginning or running a business. You do not want to get lost in the weeds of legal issues you know nothing about. This will only keep you from focusing on doing what you do best – running your new company. It can also put you and your business at risk.

Your business lawyer can partner with you now to start your business and as you grow. This professional has a knowledge of you and your business that they can carry going forward as they give you advice.

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