At WCM we live by six core values:
- Work hard together
- Be responsive with respect
- Improve yourself every day
- Think innovatively
- Treat people like family
- Do the right thing
This month we want to focus on our core value of doing the right thing. As a follow-up to our July 13th Client Education Event on entity selection, we will expand on the entity selection decision process. Based on statistics from the Small Business Administration, 220,000 small businesses were started in the United States in the second quarter of 20141. In line with these statistics, we at WCM see a lot of new businesses being started in the San Antonio area. It is truly an exciting time to be in business.
This excitement, however, can be overwhelming when you are faced with how to get a business set up properly. At our latest Client Education event, we presented the pros and cons of selecting the various common business types. One major takeaway that we wanted to share with our blog readers is a decision process that leads the entrepreneur to select the correct business type.
The process is outlined in four basic questions. You will need to understand your basic intent and purposes of the business and then decide who will participate and where will business activities be performed.
1. Who will be the owner(s)?
One of the first questions is, how many people will own this new business? If you plan to have multiple owners then the business cannot be a sole proprietor or a single member LLC. If one of your owners is not a United States citizen, or if there will be more than 100 owners, the company cannot be an S Corporation. Otherwise there are many combinations of ownership structures for businesses.
If you are the sole owner of the business, it becomes easier to control and much less complex to comply with regulations.
2. What is your intent?
Knowing why you want to start the business will help you decide which legal protections and organizational structures you need. For example, if you want to start a company where you are the main operator and owner then a sole proprietor or single member LLC may be a good place to start. You will have complete control and full responsibility for the business. With a sole proprietorship, the compliance requirements are minimal, but there is no protection of your personal assets. If you choose to create an LLC, you can insulate your personal assets from the business and still maintain control.
If you intend to work with one or more partners, then you will need to choose an entity type that offers that flexibility. Often a partnership is formed to help you establish the boundaries of ownership, control, and profit sharing. On the other hand, if you intend to utilize outside investors, then a C Corporation is often a good choice due to the flexible capital structures available.
3. Will this be a profitable business?
Sometimes, businesses are set up to be a portfolio of companies where losses are accumulated and used as a tax strategy. Knowing if you plan to operate your business to generate a profit will help you select an entity type that will take advantage of lower tax rates.
In other cases, an entity is formed to simply hold property to offer legal protection against a related business’s activities. A common example is to form a partnership that owns real estate and lease it to the operating company. The partnership is not formed for profit, but merely for protection of assets.
4. What industry will the business operate in?
There are industries where there is a significant risk of litigation. Other industries have major capital investment requirements. In those situations, you will want to choose an entity that will shield your personal assets from lawsuits or creditors. One of the most common ways to accomplish this is to form a Limited Liability Company (LLC) that by statute protects the owner’s personal assets and retains the flexibility of a partnership or sole proprietorship.
This process will help you consider some of the major questions when deciding which entity type to select in forming your new business. We also suggest meeting with a CPA and an experienced business attorney to discuss your unique situation in detail.
Finally, we will leave you with a list of next steps for getting your new business started:
- Contact your state to check for business name availability
- Draft a partnership or operating agreement
- File with the Secretary of State
- Request a tax ID from the Internal Revenue Service
- Open a separate business banking account
- Set up your accounting system and method
- Purchase adequate liability insurance
To learn more and please contact us at 210-684-1071 or email us at info@wsmtexas.com!
1Small Business Profile, https://www.sba.gov/sites/default/files/advocacy/United_States.pdf