Uncover the Stories Behind Business EntitiesBy Nina Kaufman, Esq.
You’ve felt that glimmer of the Divine impulse – that insistent idea whispering in your ear saying: “start a business . . . start a business . . . .” You have experience in your field. You’ve done your homework on determining the right clients for you, where you’d want to locate the business, who you might need to help you with it. And then you run headlong into that first real stumper of a question – like going 90 miles an hour into a brick wall – “what form of business will you choose?”
You start to read the websites and literature. You start to feel a little queasy with terms like “entity-level taxation” and “limitations of liability.” By the time you get to “transfer of ownership interest,” your head is spinning and you feel like you need a good, stiff drink (or a vacation). I don’t mean to downplay these considerations, some of which I outlined in my article, “How to Choose the Business Structure that’s Right for You.” That’s why you’ll want to have attorneys and accountants on your team to translate the mumbo-jumbo into English.
But sometimes it helps if you can see yourself in the picture. So let’s look at the forms of business from a different perspective: the owners who use them.
* Amelia, Sole Proprietor. Amelia has been a business and life coach to individuals for the past 5 years. She handles all of her clients via telephone sessions, which means that she doesn’t have people coming in and out of her home office. She enjoys the interaction with people, but also the freedom to work from home. She rents no office space, and does not need to invest large sums of money in equipment to make her business run. She had no major financial obligations that she needs to secure on behalf of the business. As Amelia is not a licensed professional dispensing advice, her exposure to liability is relatively limited (and she covers it with insurance). Therefore, the simplicity and cost (or lack thereof) of a sole proprietorship meets Amelia’s needs.
* Brad and Belinda, General Partners. Brad and Belinda have just started a law practice, and so far, it’s just the two of them. Like Amelia, their initial expenses are relatively low. But as there is more than one owner for the business, they couldn’t be a sole proprietorship. They can do most of their work online, so don’t need to invest in building a library of books for the firm. They operate out of shared office space which is already furnished, so they have no construction costs or responsibilities. Legally, they cannot use a business entity to shield themselves from personal liability for wrongful advice (they cover that through malpractice insurance), so they decided to wait to form one. Instead, they have filed a Business Certificate for Partners with the local county clerk’s office.
* Corinne, Caleb, and Celine, S Corporation (S-Corp) Shareholders. Corinne and Caleb started their pest control business in 1988. They were “inspired” to do so by the rodent problems they had in their tenement apartment when they were first married. They chose an S-Corp form because it was simple. Also, although they have grown the company to include a number of employees, Corinne and Caleb controlled the management of the company by themselves. When their daughter, Celine, showed an interest in the business, they were delighted to bring her on as an owner and “share the wealth.” As equal shareholders in the management of the company, they each receive an equal share of the profits.
* Doreen and Dexter, Limited Liability Company Members. Doreen and Dexter are the active owners of Command Control Center LLC. They provide contract security personnel as well as database technicians who make sure that companies’ computer networks are properly secured. In addition to Doreen and Dexter, there are a handful of angel investors who have provided funding to get the company up and running. However, the “angels” did not want to be involved with the day-to-day running of the company. As a result, Doreen and Dexter control 80% of the management decisions of the company, but – to compensate the investors — receive only 40% of the profits.
* Eleanor, C Corporation (C-Corp) Entrepreneur. Eleanor always thought big, even as a child. So when she was inspired to start a cosmetics company that served the needs of women of color and that used eco-friendly ingredients, she was not about to keep her idea to herself. She wanted this to go nationwide. She wanted to start a movement. After formulating her business plan, she realized that, at some point, she would want the company to “go public,” that is, to have its stock traded on a national exchange. Therefore, she chose to operate as a C Corporation based in Delaware, as that was (and is) the form most attractive to investors when taking a company public.
These aren’t hard and fast rules, but hopefully, they’ve “fleshed out” the picture of business ownership a bit. Your advisors can give you clear guidance about which form fits your needs best.