Feb 2010 - Michigan South Asian

Michigan South Asian February 2010 Page 20The Basics of Business FormationBy Farah Ahmed, The Law Officesof Farah AhmedIf you are considering startingyour own business, one of thefirst decisions that you need tomake as a business owner ishow the business entity shouldbe structured. In deciding on theright business entity, you musttake several factors into considerationsince your ultimatedecision can have an impact onmultiple aspects of your business,including the payment oftaxes, your personal liability forthe debts of the business, ownershipsuccession, and the ease ofmanagement of the business. Inmaking this important decision,the following concerns must betaken into account:1. Your intended size andnature of the business.2. The level of controlyou wish to have in your business.3. Whether or not you willbe sole owner of the business.4. Your need for accessto cash out of the business foryourself.5. The level of personal liabilityyou wish to take on asthe owner of the business.6. The tax implicationsof the different business entities.7. Whether or not youwill need or intent to reinvestbusiness earnings into thebusiness.Sole ProprietorshipThe vast majority of smallbusinesses begin as sole proprietorships.These businessesare owned by one individual,usually the person who hasresponsibility of running thebusiness day-to-day. Sole proprietorsown all of the assetsand profits of the business,but also assume completeresponsibility for its liabilitiesand debts. Consequently, interms of the law, the businessowner is one and the samewith the actual business.Therefore, while sole proprietorshipsmay be the easiestand least expensive businessstructure in terms of creation,taxation and dissolution, soleproprietors take on unlimitedliability and are legally responsiblefor all debts againstthe business. Furthermore,sole proprietors often are at adisadvantage in raising fundsfor the business and oftentimes, are limited to using personalfunds or consumer loansto add capital to the business.CorporationOne option that intendedbusiness owners may have tolimit their personal liabilityand increase their ability toraise funds is to incorporatethe business as a corporation.A corporation is considered bylaw to be a unique, separateentity, apart from its owner(s).Consequently, a corporationcan enter into contractualagreements, can be sued orand can be taxed separate fromits owner(s). The owners of acorporation are its shareholders,and may elect a board ofdirectors to oversee the businessdecisions and/or managersto run the business day-to-day.Additionally, corporations canraise needed funds through thesale of their stock. In additionto these advantages, corporationstatus also comes withseveral disadvantages, such asthe need for increased time andmoney creation, increased stateand federal regulations andincreased overall taxation, dueto what is known as “doubletaxation.” Double taxation iswhen the corporation is firsttaxed for its profits and theshareholders are then taxedfor any dividends paid to themfrom the corporation.However, the Subchapter C taxelection enables the corporation’searnings and/or profits tobe treated as distributions andtherefore, pass through directlyto the personal tax returns ofthe shareholders. It is importantto note however, that thereare certain requirements thatmust be met for a corporationto be able to elect Chapter Cstatus and the assistance of aqualified attorney is helpful inascertaining this eligibility.Limited Liability CompanyThe LLC is another option forto-be business owners. TheLLC is a relatively new hybridbusiness structure in Texasand is designed to providethe limited liability featuresof a corporation and the taxefficiencies and operationalflexibility of a partnership orsole proprietorship. Finally,GPs (General Partnerships),LPs (Limited Partnerships)and LLPs (Limited LiabilityPartnerships) are also availableif an intended business ownerwants to avail himself/herselfto the advantages and disadvantagesof the partnershipstructure.In summary, deciding on theform of business structure thatbest suits your business needsshould be given careful consideration.It is recommended thatyou consult a qualified attorneyin order to help you select thebusiness entity that is rightfor you, as the decision willinevitably have long-term andwide-ranging implications. Theabove is a very basic outlineof the available options forbusiness structures and shouldnot be relied upon in place of aqualified attorney’s advice.For a free consultation with AttorneyFarah Ahmed, The LawOffices of Farah AhmedMARKETINGEXECUTIVESCan you TALK & SELL.We are looking for you.Work from home.Flexible HoursEmail Resume:info@palepages.com