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SHOULD MY BUSINESS BE INCORPORATED?

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When starting a business one of the first questions, after figuring out where to get the money to get started, is “what form of business entity is best to set my business up as.”

There are basically four types that most people will consider.  First, is the sole proprietorship; the most basic of the four. You open your business, put your name on the door and go to work.  If you want to have a name different from your own name you’ll have to file a DBA, “doing business as,” with the county clerk. The county clerk will provide you with the proper form to fill out and file with the office along with the filing fee.

The advantage to this form is it’s simplicity. The disadvantage is that all of your business and personal assets are on the line. Meaning, if you or your business are sued, everything you own may be subject to being available to satisfy any judgment should the lawsuit turn out badly for you.

The second type of business entity is the partnership.  If there are two or more people involved in the business they can form a partnership to conduct their business.  A very common way to set up a business with more than one person.  Typically you would choose a business name and as above register the name with the county clerk by filing a certificate of co-partnership and paying the filing fee which is currently $10.00.

The purpose of having to file either a DBA or certificate of co-partnership is so that anyone who needs to know who owns the business has a way to find out.  That is a nice way of saying if someone wants to sue you they can find you.

If you form a partnership you will also want to have a partnership agreement drawn up to set forth the rights and duties of the partners as well as their ownership interest in the partnership, that is are they equal partners or some other percentage.

That brings us to the better ways to form a business.  Number three is the Limited Liability Company or LLC.  This form of business limits the liability of the business to the assets of the business, and shields your personal assets from business liabilities such as judgments or debt collections.

To operate as an LLC, you must file an “Article of Organization” with the State and have a membership agreement prepared and adopted by the members of the LLC.  In Michigan you can have a single member LLC as well as multiple member LLCs.

Besides the limit of liability, you also qualify for tax advantages with an LLC by being taxed as an individual or partnership instead of a corporation.  This is probably the most popular form of business entity currently being formed.

The forth form of doing business is the corporation.  This form of doing business is started by filing your “Articles of Incorporation” with the State and preparing the by-laws for the corporation.  You may also want an agreement as to how much the stockholders will contribute to the corporation, and how much stock they will receive for their investment.  Having a buy sell agreement in the event that one or more of the shareholders should want to leave the corporation, while not mandatory, is something that you should not do without.

As a corporation you can also make a Sub Chapter S election with the IRS to have the profits of the corporation go to the individual shareholders to be taxed at their individual tax rate.  There are certain requirements which must be met, but in a small business this should not be a problem.

There are other requirements to operating a business in any form which are beyond the scope of this article.  You should seek the advice of an attorney, an accountant, an insurance agent and other advisors as necessary to work with you as a team to operate a safe and profitable business.

 

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