Many Utah lawyers are asked questions about starting up a business. This is because all different types of people, with multiple interests, are drawn to nurturing the entrepreneurial spirit. The first thing you need to decide, once you are ready to start your business, is how you want to structure your business. These are the most common “for profit” ways that businesses are organized:
1. sole proprietorship
3. limited partnership
4. limited liability company (LLC)
5. corporation, and
Sole Proprietorships and Partnerships
For many new businesses the initial ownership structure is either a sole proprietorship or — if more than one owner is involved — a partnership.
A sole proprietorship is a one-person business that is not registered with the state like a limited liability company (LLC) or corporation. You don’t have to do anything special or file any papers to set up a sole proprietorship — you create one just by going into business for yourself. However, for sole proprietorships that will resell a product, it is often necessary to get a business resale tax license.
Legally, a sole proprietorship is inseparable from its owner — the business and the owner are one and the same. This means the owner of the business reports business income and losses on his or her personal tax return and is personally liable for any business-related obligations, such as debts or court judgments. You may not need to consult with a Utah lawyer if you would like to start a sole proprietorship, but it is always good to do so to fully understand the risks involved. However, if you have an end goal to grow a larger business, then you would likely benefit significantly from meeting with an attorney in Utah early on to structure your business right from the start.
Similarly, a partnership is simply a business owned by two or more people that hasn’t filed papers to become a corporation or a limited liability company (LLC). You don’t have to file any paperwork to form a partnership — the arrangement begins as soon as you start a business with another person. As in a sole proprietorship, the partnership’s owners pay taxes on their shares of the business income on their personal tax returns and they are each personally liable for the entire amount of any business debts and claims.
Sole proprietorships and partnerships make sense in a business where personal liability isn’t a big worry — for example, a small service business in which you are unlikely to be sued. Because liability is low, you do not necessarily need to meet with a Utah lawyer to consult regarding your business plan before starting this type of business. However, there is increased liability and risk associated with forming a partnership than there is in going into business alone since you are relying on an additional party. Any person starting a partnership will likely benefit from meeting with a Utah attorney to consult about how to best protect their interest in the company
Limited partnerships are often costly and complicated to set up and run, and are not recommended for the average small business owner. Limited partnerships are usually created by one person or company (the “general partner”), who will solicit investments from others (the “limited partners”).
The general partner controls the limited partnership’s day-to-day operations and is personally liable for business debts (unless the general partner is a corporation or an LLC). Limited partners have minimal control over daily business decisions or operations and, in return, they are not personally liable for business debts or claims. A Utah attorney experienced in limited partnerships can best assist you to structure and initiate a limited partnership.
Corporations and LLCs
Forming and operating an LLC or a corporation is a bit more complicated and costly, but well worth the trouble for many small businesses. The main benefit of an LLC or a corporation is that these structures limit the owners’ personal liability for business debts and court judgments against the business.
What sets the corporation apart from someother types of businesses is that a corporation is an independent legal and tax entity, separate from the people who own, control and manage it. Because of this separate status, the owners of a corporation don’t use their personal tax returns to pay tax on corporate profits — the corporation itself pays these taxes. Owners pay personal income tax only on money they draw from the corporation in the form of salaries, bonuses, and the like.
Like corporations, LLCs provide limited personal liability for business debts and claims. But when it comes to taxes, LLCs are more like partnerships: the owners of an LLC pay taxes on their shares of the business income on their personal tax returns.
Corporations and LLCs make sense for business owners who either (1) run a risk of being sued by customers or of piling up a lot of business debts, or (2) have substantial personal assets they want to protect from business creditors.
Both corporations and LLCs are complicated and, if poorly done, can potentially cause serious problems for the business owners. For this reason, it is often necessary for business owners to consult a Utah attorney to draft appropriate documents to structure the LLC or corporation in the best way to benefit the owners.
It shouldn’t be difficult to find an attorney in Utah capable of forming a business entity, but to best protect yourself you should meet with a few different Utah lawyers and determine which one makes you feel most confident about your business. The attorneys at Shumway Van & Hansen offer free consultations and are happy to discuss your business plan and idea with you at any time. Feel free to read more about our services on www.shumwayvan.com or visit our offices in either Utah or Nevada. Our new Salt Lake City office is opening in December 2011 at 8 East Broadway Suite 550, Salt Lake City, Utah 84111.