When starting a business, one of the most important decisions to make is what kind of business to run. Obviously, choosing the product or service you provide is important, but so is the form your business will take.
The type of business entity you form requires different things to set up, and has different ramifications for how it is run, how it is taxed, and how much it protects you (as an individual) from what your business does. When you are first starting out, there are processes and documents that need to be written and filed, no matter what type of business you choose. Because of this, talking to a business lawyer about your decision is important. If you are in the Baltimore area, The Law Practice of Ken C. Gauvey can help you with these decisions.
Why is The Type of Business Important?
A business is a legal entity of its own. The law see some companies as their own legal person that can own property, buy and sell, make contracts, pay taxes, and be sued. Then there are people, like you, who run the company behind the scenes. They might want to be separated from the company and its actions.
Businesses usually take the form of a sole proprietorship, a partnership (limited or general), a corporation (with various types), a limited liability corporation (LLC), or a limited liability partnership (LLP). They have different rules for taxation, ownership, creation, and lawsuits. One of the best things you can do to protect yourself from extra costs of litigation, extra taxes, and debt is choose the right form for your business.
Obviously, if you have concerns and questions about what type of business to start, talk with a lawyer. Every business and business owner is different. For a general background, though, this information can be extremely helpful. The following are some helpful details about the different types of businesses available:
This is the simplest form of a business. In a sole proprietorship, you are the business. That means the business you own is not separate from you, legally: you run it yourself, you own it yourself, your name is on any contracts/agreements, you pay the taxes – and if the business gets sued, it’s your name on the lawsuit.
A sole proprietorship is great for a very small business, such as a side-business making and selling something online. For anything more complex, a sole proprietorship might not cut it. If you want full control and don’t need to share it with anyone, though, this is a simple and easy option.
A partnership works a lot like a sole proprietorship, except that you get to share responsibility. In a true, general partnership, each partner is fully responsible for the business. That means they share ownership and control, they put all of their names on agreements, they are all responsible for the taxes, and in the event of a lawsuit, they can all get sued.
A true partnership is quite risky, though – you can be held responsible for the things your partners do, whether they are related to the business or not. You share everything, including income and debts. While every partner must pay their share of the taxes, you can allocate some tax aspects, such as losses, to a particular partner. This flexibility and the simplicity of a partnership are often why people choose to create partnerships rather than more complicated business entities.
Partnerships can also be organized to limit the involvement and liability of some partners. Limited partners may be something like an investor who gets no control over running the day-to-day operations in exchange for limiting their ability to be sued for the partnership’s actions. This can be a helpful way to organize a business that has “silent partners” involved.
A corporation is one of the standard business entities that everyone recognizes. A corporation is an entity in its own right. The officers of the corporation run it, sign contracts for it, and do business on its behalf, but when it comes to taxes and lawsuits, they are payed by the corporation itself. This helps to protect the people who run a company. While, of course, they might not be able to protect their financial investments if the business fails, a good business lawyer can help them protect themselves from lawsuits and debts involving the corporation.
There are various types, such as S corps. and C corps., which can vastly affect how the corporation is taxed and owned, but still generally run the company as a separate entity.
Some states, including Maryland, also allow doctors and lawyers to create “professional corporations.”
Corporations, unlike sole proprietorships and partnerships, can outlive the people that created them and keep running for centuries, with ownership traded publicly in stocks. For longevity, you can’t beat a corporation.
Limited Liability Corporation (LLC)
Though it’s called a “corporation,” an LLC isn’t technically a corporation. Instead, it is its own form of business that allows the owners to protect themselves from each other, and lets the company function as its own entity. The entity itself does not even need to be for-profit. These are often a good choice for lawyers, doctors, accountants, etc. who work with partners – but don’t want a partnership.
Limited Liability Partnership (LLP)
This is a separate business type from a regular partnership and a limited partnership. In those, the partners are generally each liable for what the business does, except for limited partners. In an LLP, each partner gets to act as a limited partner, and they are not liable for what the other partners do. This is great for professionals like lawyers, doctors, and accountants who could otherwise be open to lawsuits for their partners’ malpractice.
When you are forming a new business, it is important to figure out which type to choose. For a small business, a sole proprietorship might be enough – but if you are working with others, or simply want to protect yourself from debts and lawsuits incurred by the business, it may require more work to set up a corporation or LLC.
Let a Maryland Business Law Attorney Help You Start Your Business
If you are starting a business in Maryland, you should talk to an experienced Baltimore business lawyer about what entity type is the best choice for you. You might also need to have documents and agreements written and filed with the state. The Law Practice of Ken C. Gauvey can help you get your business organized and filed the right way. For a free case evaluation, contact us at 443-692-7685.