? Homework for Starting a Business pt 4 - Basic Business Cents Article by Lou Schultz ~ Hubbard County Regional Economic Develeopment Commission- Hubbard County, MN - Home


Basic Business Cents

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Homework for Starting a Business

Part IV-Make It Legal

by Lou Schultz, SCORE counselor

Original publish date 08/2010 (#44)


In the previous articles, you have thought through whether the new business is good for you, whether the product/service and market is real, and taken a good look at the financial projections, and researched the best source for needed funds. The next step is to legalize the entity. Factors to be considered include liability protection, taxes, and administration simplicity.

The first step is to decide what form of organization is best for you. A helpful resource is a book, A Guide to Starting a Business in Minnesota, which is updated annually. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, 1st National Bank Building, 332 Minnesota St., Suite E200, St. Paul, MN 55101-1351, telephone (651)-296-3871 or 800-310-8323, fax 651-296-5287. Professional advisors are always helpful but the options and some of their advantages and disadvantages can be addressed here.

SOLE PROPRIETORSHIP

Advantages Disadvantages
Simple to organize Owner must make all decisions
Owner is the business No separate legal status
Owner receives all profits Unlimited liability
Fewer legal restrictions Limited ability to raise funds
Easy to discontinue 24X7X365 responsibility
Owner taxed on net income at individual rates

Partnership

Advantages Disadvantages
Easy to organize, but draft an agreement! Significant individual liability—any partner can be held liable for business debts
Separate legal status Divided authority
Uses skills and resources of all partners Exit of one partner may dissolve partnership
Can leverage greater financial strength Written partnership agreement is crucial!
Partnership generally not taxed, partners taxed pro rata at individual tax rates May lose friendship of partners

CORPORATION—"C" OR "S"

Advantages Disadvantages
Limited liability for owners More complex to organize; more expensive
Perpetual life Charter may restrict types of activities
Easy to transfer ownership Must observe legal formalities, or owners risk liability
May be easier to raise capital More difficult to dissolve
May have more efficient management "Double taxation" of "C" corporation and shareholders
Adaptable--large or small organizations "S" corporation limitations

LIMITED LIABILITY COMPANY (LLC)

Advantages Disadvantages
Same protection from liability as corporation More complex and expensive to organize
Tax treatment like partnerships Must observe legal formalities or owners risk personal liability
Flexible—operating agreement governs Fairly new entity; law is developing and varies from state to state. May impact multi-state operations
Unrestricted as to number and types of members

Regardless of the form you choose, use professional advisors, observe the formalities, keep business and personal records separate, and sign documents in authorized legal capacity.

Choose your business name carefully. Consider a name that is descriptive of your business and easy for customers to remember. Some say a two-syllable word beginning and ending with a harsh sound is the easiest to remember. You may need to file the name with the Secretary of State and will want to research possible conflicts. You should also register your domain name at the same time for future use with a web site and other social network marketing.

You will want to get Tax ID numbers; Federal Form SS$ filed with the IRS and Minnesota filed with MN Department of Revenue. The filings can be done on-line and there is no fee to file. Business licenses, federal, state, and local may be required for some businesses. State licenses are listed on-line at www.state.mn.us under License Minnesota.

This article is intended to be a guide for your preliminary thinking but is in no way a substitute for advice from an attorney and/or a certified public accountant.

Homework for Starting a Business, part 5

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