Choosing the right business form for your company is one of the most important decisions you'll make as an entrepreneur. In these lessons, we're going to walk through some of the steps which you want to take into consideration when making that decision. Why is this so important? First is, depending on the business form you choose, there are certain legal issues that may arise, particularly legal liability for you as an individual and legal liability for your business itself as an entity. Taxes and tax strategies become very important financing, as well as having pretty clear roles and responsibilities for the owners and employees of your business. The different forms of business that you can choose from are partnerships, and there are three forms of partnerships; general partnerships, limited partnerships, and limited liability partnerships for certain professional organizations. A limited liability company, which is a business form that allows you to have the benefits of a pass-through tax treatment, but also shields the individual owners from personal liability. For the LLC, a corporation, and there are two forms of cooperation; we have S Corps which includes some of the pass-through tax treatment of an LLC or a partnership, but it also has the ability to shield the shareholders from personal liability. Then you have a C Corp, which is a separate entity, it pays its own separate taxes. It's the most common idea when you think of a corporation, you're thinking of a C Corp. Then finally, a sole proprietorship. While it essentially is an individual doing business under his or her own name, it is considered a business form. It's not a business form that it's advisable to operate under, largely because it exposes you as a business owner, and as a sole proprietor to a limited liability for your business activities, and so you want to find strategies to limit personal liability as well as the favorable tax treatment. In this lesson, we're going to talk about some of the factors that you want to consider when choosing the right business form of the ones that we just discussed and then we'll talk about getting your business registered once you've decided what form your business will take. Some of the factors that you want to consider are; who are the owners of the business and what they care about, and the type of issues that they want to make sure are addressed through the type of business form that you decide. Then you want to consider how earnings are going to be distributed or are earnings going to be distributed now, today or will the business decide to hold on to its earnings until later and pay them out in the form of dividends or other types of payouts, and then profit loss projections. As a business owner, if you're projecting to make profits right away or have losses in the early stages of development, that factor will help you determine what is the best business form to start your business under in the early stages. Let's talk about owners. Now, while this is an important factor, often times, it's not a determinative factor because with the various forms of business, owners may have multiple preferences, and so while it is an important factor, I want you to understand upfront that this is not one that you should give a whole lot of weight to. But, if you're going to have several shareholders, unlimited amount of shareholders or your business is going to be publicly traded, or you're going to have employees that have equity interests or ownership interests in the company, or you're seeking venture capital funding, these types of ownership interests, if these are the avenues that you're considering now as you're thinking about how to form your business, then a C corporation is preferable. A lot of VCs won't do business with an LLC, for example, they will only do business with the corporate form and owners care about pass-through tax treatment, then you want to consider an LLC or an S corporation. These types of considerations that your individual owners may care about will help you decide which of the different forms of business that you want to pursue. The next issue is earnings. When you will be distributing earnings, whether it's now, or whether you're going to hold the earnings and reinvest them to be sold for stock or other equities later on in your business. If you're contemplating, distributing your earnings right now, it's the early part of your business, then you want to consider having a tax pass-through entity such as an S corporation or an LLC. That's because these earnings will be taxed as ordinary income on the individual owners tax returns. If you have a C Corp now and you have an earnings that you're distributing now, then it may result in some forms of double taxation. That's because a C corporation is taxed as a separate entity, so the C Corp will pay taxes and then the individual shareholders will also pay taxes on those earnings. That's an important factor to think about in terms of which entity form you decide to pursue. If you're thinking about not distributing the earnings now but re-investing them so the company can grow and further develop with an eye towards selling those earnings stock later on as your business grows, then keep in mind that the increase or the gain that's achieved through the sale of your stock. That increase is usually tags that pretty favorable rates, it's called capital gain rates. If you're thinking about that type of use of your earnings, it may be okay to have a C Corporation or another entity that allows you to engage in the sale of equities. Next, we'll talk about profit and loss projections. As the founder of your business or the owner of your business, if you think that initially your business is going to generate profits, then a C Corp is a preferred business entity. That's because the C Corp not only shields the shareholders from personal liability, but it also allows you to, if you're going to be generating profits you can immediately get distributing capital gains for your shareholders, which are tax, are fairly favorably. If in the early stages you expect to be generating losses then having a tax pass-through entity like an LLC or a partnership or S Corporation is preferred because the individual owners can then use those losses against the individual tax returns. It's a favorable tax strategy for your owners. Now let's talk about registering your business. After you've decided what form your business will take, the next step that you want to take is registering your business with whatever state that you want to do business in. The first part of that process is to clear the name of your business with the Secretary of State's office or whatever agency in the state that controls the registration of businesses. Most states where there's the Secretary of State or another government agency within the state, they have a database of every company that's registered with the state, every company that's a foreign company from another state or another country who's doing business in that state. They also have a listing of names that have been reserved. You can go in and just make sure that the name of your business is not one that's already registered or was a foreign company doing business in that state or is a name that's already been reserved. Now please note that even if you've clear a name with the Secretary of State's office and you have a name for your business, that doesn't mean that you can actually use that name in that state in connection with your business. You still have to keep in mind potential trademark issues. There may be entities who are using the name of your business in a trademark sense, and so you want to ensure that you're not infringing upon trademark rights. You can consult a lawyer to ensure that even if your name has been cleared by a state, that you don't have trademark issues to be concerned about. Also, before deciding on the name of your company, even if it clears the Secretary of State's office, even if you've surmount at any trademark owners, you also want to check to see whether there's an Internet domain name available with that name. Oftentimes when people are searching for your business, they want to see a website, they want to go to a URL, it's advantageous to have a URL that also includes your business name. That's another step in that process of choosing the name of your business is figuring out whether you can have a website that includes the name of your business. After you've completed all of those steps, you also want to consider the availability of your business name in other states, the ability of the name, whether you need to register as a foreign entity in those states, what tax implications may apply in those states, these are all steps since you want to make sure you check off just to ensure that you can not do business in a state where you're primarily registering your business, but also you can do business in other states. Just as a summary here, the pros and cons of different business forms, and those pros and cons primarily relate to personal liability for the owners of the business, as well as a tax treatment for the owners. When you're thinking about the business form that you'll take, you want to consider who the owners are and what they care about, the distribution of earnings, the projections for losses or profits. When you're registering your business, you want to not only check the state in which you primarily doing business but you also want to look at the availability for registration in other states where you may be conducting business. As with all of these difficult decisions, to the extent you can, you want to seek the advice of experience council before not only choosing a business form but also registering that business.
