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Small business incorporating |
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When you think of business, your natural focus is on earning money. Millions of small businesses incorporating in the US do not follow any formal business structure. The trend may extend to businesses the world over. Money earned without a formal business structure goes unaccounted for. All money that changes hands this way does not reflect in the gross national product of a country. Thus, business incorporating is important for a countrys growth and prosperity. Entrepreneurs will be well advised to consult their attorney on these matters regarding laws relating to the state, city, or town. Formalities need to be complied with, even if it involves filling out forms, maintaining books, records, and filing tax returns. It does help to start on a firm legal foundation. If, for some reason, you wish to sell your profitable small businesses incorporating, your buyer will pay a handsome amount if all the legal requirements are complied with. It is important to seek professional help. Although it may cost anywhere from a few hundred to thousands of dollars, this investment may go a long way in protecting you against potential liabilities and/or legal hassles later. Moreover, you can focus your complete attention and energies on your business without worrying about legal matters and issues. An entrepreneur planning to start a business of his own, whether small or large, has to make a choice of the business structure that suits him and the company the best. The four basic business incorporation types are: sole proprietorship, partnership (both general and limited partnerships), corporation (both S and C corporations), and limited liabilities company. What type of structure to choose, depends on the type of business, size of business, and various other factors. Sole Proprietorship A sole proprietorship is best suited to new and small business ventures. In this small businesses incorporating, the entrepreneur is the sole owner and representative of the business. As a sole proprietor, the entrepreneur may work alone or may have numerous employees. The sole proprietor absorbs all the risks and earns all the profits. He assumes responsibilities to pay off the debts, while the business earnings are his. For taxation purposes, a Federal Identification Number is not required, since the Social Security Number suffices. A sole proprietorship has a great advantage. The sole proprietor is not required to comply with any legal formalities at the formation stage. It is the most economical of all business structures, as you can form it with very little cost and you require very little paperwork as well. The disadvantage with this structure is that the liability of the sole proprietor is unlimited. This means that in case of losses the personal assets of the proprietor can be legally attached to pay off business debts. Partnership When you, your friend, or an associate decide to do business together, you may enter into a partnership. Two or more persons can form a partnership firm to carry on a business or commercial activity. Normally, a partnership is represented by a partnership deed that includes a legal agreement between the partners, though it is not legally necessary. Many partnerships are informal in nature, where the partners do not enter into any written agreement to carry on business. They depend on trust and faith. Partnerships can go sour, and partners can opt for legal recourse only if they have a registered partnership deed. Thus, even if it is a partnership between the best of friends, it is advisable to enter into a partnership agreement and have a legal partnership deed created. During the course of business many misunderstandings can crop up. A partnership agreement can help avoid such conflicts. A typical partnership deed contains details about the extent of each partners investment and intellectual property. It defines the roles and responsibilities of the partners, how the income and profits are to be shared, and how the losses are to be dealt with. Corporation Each state in the US has its own set of laws that govern the formation of a corporation. Thus, it is best to consult a legal expert in such matters before you even think of forming a corporation. Unlike a sole proprietorship, the advantage of forming a corporation is that the liability of the individual owner is limited only to his or her share in the business, as the personal assets cannot be attached legally. The disadvantage of having a corporation is the amount of formalities involved in maintaining it. The company must have an elected representation of a board of directors. It must issue stocks, and maintain their transfer and change in ownership. Corporate guidelines need to be followed, and shareholders meetings are to be held, which the owners are required to attend. Normally, very large organizations opt for this business structure. For more and appropriate information, it is always better to consult with your attorney or accountant. Limited Liability Corporation Arguably, a limited liability corporation is an ideal business structure. The advantage with a limited liability corporation is that it limits the owners liability to losses. In case of losses, the owners liability remains limited to his or her share in the small businesses incorporating. The owners personal assets and finance are safe and cannot be attached to payoff the companys liability in case of losses. Another significant advantage with this business structure is that no stock issuing is required, nor any shareholders meetings are mandatory. The disadvantage with a limited liability is unlike other forms of business structures, this form has not been tested in the court system to the same extent as the other types of business structures. Further, certain states allow a minimum of 1 person member in the LLC; others require a minimum of 2 persons. Capitalization After you have settled the business structure issue, your next point of focus should be capitalization. You will have to decide whether to finance the venture of your own or have investors or lenders, to provide for the remaining finance. The benefit of borrowing, though its adds to the cost, is that no claims can be made beyond the debt amount. Startups find meeting the requirements of the lenders a trifle too tough because of the reluctance of the lender to participate in the risk of the venture. However, try to identify the reasons for refusal, so that you can prepare yourself when confronting another lender. Equity financing is another way to raise capital for your business venture. In this case, you sell shares of ownership to raise capital and the investor shares the risk of the venture. The advantage is that you do not have to pay any debt service. However, the investor has a share in the profits of the company. You should be careful not to sell your equity for a lower price. Before you decide which small businesses incorporating structure to adopt for your business venture, it would be advisable to consult a legal and tax advisor on such matters. Expect the expert to guide you on matters, based on the nature of your business, and other features and requirements.
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