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Starting A Business? What to know before you start a for-profit business
Type of entity – Should I incorporate? What other types of entities are there?
I asked an attorney friend of mine “when should a client consider incorporating their business?” His response was: “If the
client has any assets in his or her name they should incorporate.” The reasoning: the corporation gives a veil of protection between the company's assets
and any personal assets. That's not to say that a lawsuit will not be initiated against you personally – it is theoretically harder to sue the individual
through his corporation. However, to ensure this protection the shareholder(s) MUST keep personal and business transactions separate.
Brief descriptions of entities under consideration:
- Sole Proprietorship: The business has one owner. Very easy to set up. If no other employees, you don't even need a federal employer identification number
from the IRS. You use your social security number as your identifying number.
- General partnership: Consists of two or more partners. You should have a partnership agreement that sets forth partner's rights and obligations.
- Corporation: A separate legal entity formed under state corporate law. The Company is required to file Articles of Incorporation with the Secretary
of State. The Company has shareholders who own stock in the corporation. The Company should also have a board of directors who provide general oversight and
direction and officers who run the day-to-day activities of the business.
- Limited Liability Company: A hybrid entity that combines many of the features of a partnership and a corporation. LLC's are formed under a state LLC statute
– all 50 states now recognize the LLC as an entity – which requires Articles of Organization to be filed with the Secretary of State and that the members
(owners) of the LLC enter into an Operating Agreement.
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