BUSINESS FORMATION FAQ
Q: I am an entrepreneur looking to start up my own corporation. What business formation should I be looking into?
A: A business owner must be aware of the main business organization forms, their characteristics, and the law that governs their management and formation.
A Sole Proprietorship is created when an owner simply begins business. It is simple and inexpensive to form and is usually chosen by one-person businesses. The owner owns all of the assets. The owner also has unlimited personal responsibility for business liabilities. The owner is taxed on all income from the business at applicable individual tax rates.
A General Partnership is formed when two or more persons carry on as co-owners of a business for profit. Each general partner participates in the management, owns the assets, and shares the profits and losses. Each general partner is personally liable for business related obligations. General partners are taxed on their individual tax returns.
A Limited Partnership has at least one limited partner who contributes capital, but does not have substantial management control. The limited partner has limited liability to the extent of their capital contribution to the partnership.
A Limited Liability Company combines elements of partnerships and corporations. LLCs must file articles with the state. As in a limited partnership, the owners only risk losing money that has been invested into the LLC and only LLC assets are used to pay its debts. However, an LLC is not a separate taxable entity, and LLC owners report profits and losses in their individual tax returns.
A Corporation is a separate legal and taxable entity. One must comply with statutory formalities to set up a corporation. Barring certain exceptions, the owners of the corporation are protected from the corporation's liabilities.
Q: What are the possible consequences of personal liability for business debts and obligations?
A: Personal liability can devastate the accumulated wealth of a lifetime of work. This form of liability opens the individual to claims for a wide range of business obligations. Most people realize that personal liability may extend to business losses, but other obligations may also reach individuals, including:
Damage awards in lawsuits;
Tax deficiencies and penalties; and
Back wages and benefit payments.
Limited liability offered by incorporation shelters business owners from personal liability. Certain types of insurance can also help cover business owners, directors, and officers. However, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.
Should a business use a "doing business as" name?
Depending on the business marketing strategy, a business may need to use a "doing business as" name, also known as a "d/b/a" or a "fictitious business name."
For instance, a sole proprietor runs the business alone and the business's legal name will be the sole proprietor's full name. But the sole proprietor may market the business as AA Appliances. In that case, the business's legal name is different than the name under which it operates and is known by customers. The sole proprietor is using a "doing business as" name. A "doing business as" or "d/b/a" name is also known as a "fictitious business name." Most states require that businesses register fictitious business names or d/b/a names.
Using a "doing business as" name is common practice for businesses. The d/b/a name will usually be the cornerstone for marketing efforts, and will work much more effectively than the business's name. Some business entities may be barred from using a d/b/a name in some states, however. This usually involves professional business entities that must be known by the names of their owners. In most other cases, using a "doing business as" name or "fictitious business name" is permissible, as long as it is registered with the state.