Do you have an idea for a new business?  Where do you start, to transform that idea into a money-making venture?  Determining the requirements for a business formation is one of the first and most important steps in starting a business.   Selecting the most suitable form of business entity can make a significant difference in terms of taxes, liability, profitability, and growth. 

At the Law Office of Jennifer M. Settles, we will review your business idea with you and advise you on your best legal options.   We'll guide you through the process, proactively making sure you have the forms, documentation, and other necessary information and strategies in place for a successful venture. Contact us today at 602-617-3938 to schedule a free initial  consultation.

How Do You Form a Business?

When forming a business, one of the first decisions to make is the structure you will use.   A business structure is the legal classification of a business that determines taxes, liability, and other legal rights and responsibilities. 

Various business structures are available, including:

• Sole proprietorship
• General partnership
• Limited partnership (LP)
• Limited liability company (LLC)
• C-corporation 
• S-corporation
• Nonprofit corporation  

The best business structure for your business depends on a range of factors. 

What Factors Influence Business Formation?

The following is a list of some factors to consider when choosing the best legal structure for your business: 

Control

A major deciding factor when structuring your business is often the degree of control you want to retain over your business. This is especially true where multiple owners are involved or anticipated.

For LLCs and LPs, control (including day-to-day decision making, scope of authority, and approval rights for major decisions) is typically dictated by the terms of the operating agreement or partnership agreement, as applicable.   In the absence of such an agreement, control is dictated by the laws of the state in which the entity is formed.   In comparison, control over corporations is generally governed by the terms of applicable state statutes.

Liability

Your business structure also determines the extent of the owners' and managers'  personal liability for the liabilities, debts, and obligations of the business. It is important to understand that some structures offer better protection against personal liability than others.   Moreover, failure to carefully follow correct protocols can result in an inadvertent loss of a liability shield. 

In a sole proprietorship, for example, the owner and the business are one and the same from a legal perspective.   As a result, the owner of a sole proprietorship is personally responsible for the business's liabilities, and accordingly, the owner's personal assets may be used to satisfy the business's debts. In a sole proprietorship, the owner can be sued in regard to the business' activities. 

In comparison, in a corporation, LLC or LP, the shareholders, members or partners have a separate legal identity from that of the business, and their exposure for business liabilities is generally limited to their investment in the business.

Taxes

The structure of a business determines the applicable tax regime. Many business structures – sole proprietorships, partnerships, LLCs, and S-corporations – are pass-through entities. This means that the business doesn't separately pay tax. Instead, the tax attributes of the business are passed through to the owners who pay taxes on the business profits via their personal tax returns. 

C-corporations, on the other hand, are separate legal entities from their owners, and therefore are taxed according to the relevant corporate income tax rate. 

Administration and Operation

The administration and operation of a business typically becomes more onerous as the complexity of the business structure increases. 

Sole proprietorships and general partnerships typically have the least complex paperwork and operational obligations, while LLCs, LPs and corporations can have specific fiduciary obligations and governmental reporting obligations. 

Six Important Ways a Lawyer Helps Your Business

A business lawyer can advise you on a range of issues when forming a business. 

1. Choosing the Right Structure for Your Business

Choosing the right structure is the key to building a strong foundation for your business and its growth.  A business lawyer can advise you on the pros and cons of each structure available to you, relevant to your circumstances.   This will help protect your interests now and into the future.

2. Selecting the Correct Domicile for Your Business

Selecting the correct domicile for the state of formation of your business is important, as the state of formation can have significant tax, operational, liability, administrative, and public disclosure implications.  A business lawyer can help you select the most beneficial state of formation. 

3. Industry-Specific Advice

A business lawyer can give you advice specific to the industry in which you operate and the products and services you are offering. This includes assisting you with understanding the applicable regulations and any necessary licenses or permits. 

4. Negotiating and Drafting Legal Documents

Business formation typically involves the preparation of a range of documents, such as articles of incorporation, bylaws, LLC agreements, partnerships agreements, subscription agreements, buy-sell agreements, joint venture agreements, resolutions, meeting minutes, and other commercial documents. A qualified business lawyer can assist you in accurately negotiating, drafting, and understanding these documents. 

5. Protecting Against Personal Liability

Importantly, a business lawyer can advise you on strategies and processes to avoid inadvertently incurring personal liability for the liabilities and debts of the business.   Failure to adhere to proper protocol can trigger a "piercing of the corporate/LLC veil".     A business lawyer will explain to you the do's and don'ts critical for protecting the managers and equity owners of the business.

6. Raising Capital

A business lawyer can advise you on strategies and legal requirements for bringing investors into your business, and for obtaining business loans. 

Contact the Law Office of Jennifer M. Settles Today 

If you are considering starting a new business, we can help you make the necessary strategic decisions. Contact the Law Office of Jennifer M. Settles today to schedule a free initial consultation, at www.jsettleslaw.com.   You can either fill out our online form or call us at 602-617-3938. We look forward to helping make your new business a successful one!

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