Last month we provided a list for new business owners to follow in order to start up a new business successfully. We elaborated on the first step: picking a business name and registering it with your county (DBA – Doing Business As); this month, we will delve into checklist item number two: deciding on the legal forms of business ownership.
A major decision you will need to make as a new business owner is how you want your company structured. This decision should not be made lightly, as it will have long-term implications. When trying to decide, please take into account the following:
· The size and scope of business you hope to attain
· The level of control you wish to have
· The level of structure you are willing to deal with
· The business’s vulnerability to lawsuits
· Tax implications of the different ownership structures
· Expected profit (or loss) of the business
· Whether or not you need to re-invest earnings into the business
· Your need for access to cash out of the business for yourself
There are four basic legal forms of ownership for small businesses:
· Sole Proprietorship
· Limited Liability Company
The legal form of your business should be handled by a professional. If you are the sole owner, then an attorney can assist you with deciding what works best for your interests and future goals. If you are partnering with others, we highly recommend that each of the partners consult with an attorney separately first to discuss his/her options. Keep in mind that business partners, especially if they are not related to you, can become a serious liability. There have been numerous gyms that have been decimated by partner disagreements, divorces, and poor planning. It is reasonable to assume each partner will want to ensure that his/her interests are protected in the event that the partnership dissolves.
In our case, our gym started as a partnership between just us (Stephanie and Carrie). As the business grew, we added our mother as another partner. Because we are family, and new to the business world, we never consulted an attorney about our partnership agreement. When our gym grew even more and we took classes and attended business conventions, we realized that a change would be needed. We consulted with our attorney and he recommended that we switch to an LLC (Limited Liability Company)to limit the liability incurred by us as individuals. Talking to a lawyer will also help you find the best option for your business.
-Stephanie Beveridge and Carrie Harris