To Incorporate or Not Incorporate – That Is the Question

As we end the celebration of Women’s History Month, we wanted to focus some attention on the female entrepreneurs of our community, specifically those who are just starting their businesses.

Start by answering this legal question: What business structure is best for you?

Here’s a look at four of the most popular structures.

Sole Proprietorship
The simplest way to start a business is through a sole proprietorship, and, as the name implies, it means you for yourself and are self-employed. It’s a legitimate business and usually involves obtaining a license to do your business, a permit, and possibly some other regulatory requirements depending on your state or city and the type of business you are opening.

Even though you are doing business as a sole owner, you may want to use a different name like “Cindy’s Calorie-Free Cookies.” In that case, you can create what is called a “Doing Business As” or “DBA.” This would allow Cindy to go to the local farmer’s market and sell cookies under her business name.

The Good: As the sole owner of the business, you get to make all the decisions, and if it is a success, your sole bank account will be the one filling up with cash.
The Bad: On the flip side, if your business doesn’t do well, it’s all on you. Including any loans you may have taken out in the process.  The loans are one hundred percent your responsibility, and the bank will come after your personal accounts and assets if it goes unpaid.

Partnerships
If you don’t want to go it alone, you may set up a general partnership. In a general partnership, both partners are fully liable for all profits and losses and fully control the business. You need to make sure you go into a partnership with someone you trust, and we suggest you set up a partnership agreement with your attorney.  Why?  The agreement will lay the groundwork for how you will divide profits/losses, sell the partnership, and what happens should someone pass away or decide they no longer want to be an owner.

There is also a limited partnership agreement that limits a partner’s interest, as the name implies.  A “limited partner” may invest in the company but not make any decisions on the day-to-day operations or overall goals; they just receive a percentage of its profits every month.

The Good: You have someone to share the workload, brainstorm ideas, and split costs.
The Bad: You do have to make joint decisions and split profits.

LLC
Another way to structure your business is through a Limited Liability Company, (LLC). As the name implies, it limits your liability, which means if the LLC gets sued, your personal assets are shielded. So, if someone gets sick from eating a cookie at “Cindy’s Calorie-Free Cookies,” they will be limited to the assets of the business, not Cindy’s personal savings account.

LLCs are popular with small businesses and can be structured as single-member and multi-member.  I go into this in more detail in my book–you can grab a copy here.

The Good: In addition to protecting your personal assets, LLCs are a good option for small businesses because they are easier to run with fewer owners and allow for flexibility.
The Bad: Not everyone is allowed to create an LLC. Check with your state to see if your type of business can be structured as an LLC.

I dig deeper into all of these structures in my new book, “Legal Things Parents Should Know”.  Be sure to always consult with your attorney and accountant as you make these business structure decisions.

If you’ve recently started your own business, or are in the process, do not hesitate to reach out with any legal questions regarding the processes involved. Please call or email us at 866-566-9494 or Assistant@jlonglaw.com if you have any questions regarding this process.