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If you’re thinking about starting a business, this may be your first foray into the exciting world of entrepreneurship, and may undoubtedly have many questions regarding which type of business you should form and the steps required for each. Keep in mind that every type of business has its own advantages and disadvantages. And by ensuring that you file for the correct business type and are knowledgeable about how to keep the business running, you can prevent the risk of bankruptcy. However, if at some point in your business career you do encounter financial difficulty, bankruptcy can be a great resource.
Sole Proprietorship
A sole proprietorship is the simplest type of business you can form. Since you will be the only owner of the business, you and it, for all practical purposes, are one and the same. Consequently, all you need do is choose a business name and start finding customers. For security purposes, however, you may wish to obtain an Employment Identity Number (EIN) from the Internal Revenue Service. This way, you won’t have to use your Social Security number to identify your business when you send out invoices.
Partnership
If you intend to go into business with someone else, you may wish to consider forming a partnership. If It is strongly advised that you draw up the partnership agreement and have all parties sign it so that the following can be set forth:
- What assets each partner brings to the partnership
- What percentage of the partnership each partner will own
- How the partnership’s profits and losses will be distributed between or among the partners
- How long the partnership will last
- What happens in the event of bankruptcy
- The type and amount of authority each partner will have
- How and by whom business decisions will be made
- How disputes will be resolved
- How a partner’s death or withdrawal will be handled
Corporation
Establishing a corporation is more complicated than establishing a sole proprietorship or a partnership. First you will need to choose a corporate name that complies with your state’s corporate name requirements and conventions. Then you will need to decide which type of corporation you want to form. In general, your choices consist of the following:
- C corporation, i.e., “regular” corporation, that pays its own income taxes
- S corporation that passes through its profits, losses, deductions and credits to its shareholders
- LLC, i.e., Limited Liability Company, that’s a hybrid between a corporation and a partnership, offering many of the advantages of each
- Nonprofit corporation if you intend to use your business’s excess profits to benefit the organization rather than distributing them as additional dividends
You will then need to draft your articles of incorporation and bylaws to file with the business division of your secretary of state’s office. You’ll also need to purchase an official corporate seal. As a bankruptcy lawyer from The Law Offices of Ronald I. Chorches suggests, as you continue to build your business, always keep financial documents organized and in a safe place. So if you find yourself needing to access these for one reason or another, such as for tax purposes or filing for bankruptcy, they will be readily available.
