People who are starting a business in Indiana must juggle many issues. From the product or service they are selling, to the financing, to the seemingly endless number of decisions they need to make, they are simultaneously excited and fearful. It can seem overwhelming. With that in mind, the fundamentals should be set to craft a strong foundation from the outset.
One issue that needs to be addressed in the early stages is the business structure. This can be more complicated than people realize. Control, decision-making, taxes and more are in the balance. People in this situation should know whether a formal business entity or a less formal one is preferable for their needs.
Know the difference between formal and less formal business entities
Formal business entities include corporations, a Limited Liability Corporation (LLC), a Limited Partnership (LP) and a Limited Liability Partnership (LLP). The selection is important to the financial future of the owners.
For example, a type of corporation commonly known as a C corp protects owners because it lets them separate their personal finances from business finances. This is imperative if the business falters or gets in legal trouble, their personal assets will be protected. Another type known as an S corp is limited in the number of owners it can have and avoids double taxation.
Partnerships are unincorporated. With an LLP, the partners will not be vulnerable to any debt or obligation of the LLP. In addition, if there is misconduct by partners, the other partners are not liable for it. This can shield them from legal claims and keep personal assets out of the equation.
Less formal business entities include a sole proprietorship and a general partnership. While corporations are likely preferable for people who are working with many others in a more complex endeavor, a person who is starting an individual business can simply have a sole proprietorship.
A person who, for example, repairs computers on their own can have a sole proprietorship and have complete control, limited expenses to start the business, and pass-through taxes where they are charged as an individual.
Make sure to select the correct business entity
Making a mistake when selecting a business entity can be costly financially and personally. Those who select a formal entity over a less formal entity or vice versa when it is not appropriate to their product or service could face challenges they would not otherwise face if they made the right selection from the start. Whether it is a small, medium-sized or large business, it is essential to have a well-thought-out plan. Consulting with business law professionals can be helpful.
