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2014

If there was one business mistake that I saw far too often back when I practiced law, it was the entrepreneur who failed to choose the right legal entity for his or her business.

 

It seems like no big deal, right? I mean after all, does it really make that much of a difference if you choose, say, a partnership over a Limited Liability Company (LLC)? You bet it does. It’s a huge deal in fact. It could, for instance, mean the difference between keeping your house and losing it.

 

When many entrepreneurs start out, they begin their venture as sole proprietors and the reason for this is simple: this form of business is easy and cheap to create. All you need to do is obtain a business license and a bank account, and away you go. No expensive lawyer to retain, no complicated forms to fill out. And no legal protection (but I will get to that in a moment).

 

Steve-Strauss--in-article-Medium.pngThere are, essentially, four different forms your business can take:

 

  • Sole proprietorship
  • Partnership
  • Corporation
  • LLC

 

There are pros and cons to each, so let’s take a look.

 

Sole proprietorship: This is the proverbial ‘hanging out a shingle’ approach. It takes but a few forms to create a business this way and that is because it is not really a separate business. It is considered “doing business as” or a dba. Sheila Bookman is doing business as Sheila Bookman Enterprises.

 

The problem for Sheila is that, because she and the business are one and the same, if anything goes wrong with the business, Sheila is personally on the hook. If the business gets sued, Sheila is the one being sued. If the business goes under, it is Sheila’s personal debt.

 

Partnership: If you have a partner, then your business can be a partnership (or a corporation or LLC as explained below). But, as with a sole proprietorship, a partnership does not afford the partners any legal protection. The good news though is that you will have a partner, and not unlike a marriage, your partner is equally responsible for the business’ debts and obligation so in that regard it spreads the risk around.

 

Another option is something called a limited partnership. This means there is one “general partner” (you, for instance) and several limited partners. The general partner runs the day-to-day operations of the business, while limited partners are essentially passive investors with limited liability.

 

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Corporations: S and C corporations (S and C are subchapters of the tax code) are another option that solves the problem of liability. Once incorporated, the business becomes a separate legal entity and is liable for the business’ debts and activities. If something goes wrong, it is the corporation, and not you individually, that is liable.

 

Becoming incorporated offers other benefits as well, including:

 

  • The ability to issue stock, and thereby attract investors
  • The chance to offer employees shares of the business
  • An opportunity to  enhance credibility since people tend to take a business more seriously if there is an ‘inc.’ after the name

 

To get these benefits requires the owner(s) to follow the rules and procedures for starting and maintaining a corporation. This may require the assistance of an attorney, an accountant, or both. You will need to file the right documents with your state, keep records, hold directors meetings, and, do all of those things that a proper business is expected to do.

 

Additionally, there are tax consequences to choosing the corporate structure, and these must be reviewed with your team so that you can make the right decision for your business.

 

LLCs: Limited Liability Companies are like a cross between a corporation and a partnership. Like a partnership, they are less formal, but they still provide the limited liability that makes the corporate structure so attractive. That said, there are also a few downsides to the LLC structure:

 

  • Taxes: Single-member LLC owners are treated as sole proprietorships for tax purposes and must pay self-employment tax on income generated by the LLC (unless it chooses to be taxed as a corporation). With multi-member LLCs, the profits and losses are generally treated as individual income for each LLC member.
  • Investment issues: Because corporations have been around longer (LLCs are a fairly recent phenomenon) and investors are used to them, an entrepreneur may find the corporate structure more conducive to outside investment.
  • Lack of structure: The very nature of an LLC, with its looser structure, may be problematic unless clear lines are laid out from the start.

 

However, these drawbacks do not usually prove to be too significant, and unsurprisingly, LLCs are the structure of choice for many entrepreneurs.

 

Choosing the right form for your business does not need to be overly difficult or time-consuming, but it is something that requires some thought and effort. You should definitely speak with your lawyer before making this decision. It is Business 101 to choose the right form, and is business malpractice if you don’t take this choice seriously.

 

So, let’s pass the first test and make the right, smart decision.

 

Disclaimer: The opinions expressed are solely those of the author and interviewees.  You should consult a qualified professional to assist you in determining the most effective business structure and/or tax structure for your business.

About Steve Strauss

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.

http://www.smallbusinessonlinecommunity.bankofamerica.com/people/Steve%20Strauss/content

You can read more articles from Steve Strauss by clicking here

I have a good friend who started a bed-and-breakfast with his wife five years ago. It had long been their dream to ditch the rat race and become their own boss. Understandable, especially since they seemed to have a great relationship. But I must confess that we (my buddy’s pals) didn’t love the idea. It was not that we didn’t like his wife – we did, very much. We just felt that too much of a good thing might become a bad thing.

 

But here they are five years later, and business is booming. When I asked him how the being-married-to-your-business-partner thing is going, he responded, “The good news is that I see Rachel a lot. The bad news is that I see Rachel a lot.”

 

All joking aside, he is very happy with his choice but cautions that it is not for everybody. Having spoken with him, and a few of the other people I know who have worked with their spouse, I have compiled five suggestions that should help anyone considering the same approach:

 

Steve-Strauss--in-article-Medium.png

1. Playing the game is different than watching the game. Running a business is like being on a team together. When working together, spouses will play the game on the same field every day. You will not have someone cheering you on from the sidelines. So ask yourself: would you rather have a teammate on the field with you or in the stands cheering you on?

 

Additionally, on a day-to-day level, this also means you will be working the daily grind with your partner. He or she will not ask you how your day was when you get home, because they already know.

 

2. Divide and conquer. Running a business is not the same, not by a long shot, as being in a relationship. Just as you would with any business partner, sit down with your spouse and assess your weaknesses and strengths. One of the best parts of bringing in a business partner, be it your spouse or not, is that they add to the skill set of your business. As an entrepreneur, you undoubtedly have your strengths and weaknesses. When choosing to work with your spouse, be sure to divide up the duties so that you play to each other’s strengths.

 

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3. Set some ground rules. When you work with your spouse, it is always personal. Figure out the best way to work together, and write down a few written guidelines that each of you will try to follow. But remember this too: rules are made to be broken. Guidelines are just that. They will change as you and your business do. When in doubt, communicate.

 

4. Take time away . . . alone. As with most new entrepreneurs, expect to work hard and get little time off with your new business. As such, that makes whatever time you do have to get away important. And this is even truer when you work and live with your business partner. So be sure to take a break, even if it’s only for coffee, a walk, or a night out with friends. It’s smart to carve a little breathing room for yourself, and it’s healthy for your marriage and your business.

 

5. Fake it ‘til you make it. Anyone who says they know the secret to running a business successfully with your partner is probably wrong. Sure, ask for advice, but remember you and your partner know your relationship and your business best. What works for someone else may not work for you. Know that it usually takes a while before you ease into some comfortable roles in your business.

 

In the end, the best advice is to take the tips and advice that you like and make them your own. Running a business with your spouse is an adventure. Enjoy the ride.

 

About Steve Strauss

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.

http://www.smallbusinessonlinecommunity.bankofamerica.com/people/Steve%20Strauss/content

 

You can read more articles from Steve Strauss by clicking here

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