Business Ownership Basics
The basic of any business ownership is the legal structure of your business. All business should have a separate identity and existence from the business owners for obvious reasons. The cardinal principle of business is earning profit. To know whether your business is profitable you have to keep it separate from your personal life. Your business can assume different structures suitable for the type of business you operate. If you are running a small business as a paying hobby and does not involve any risky transactions, you may assume the structure of a sole proprietorship. It provides you with all the flexibility you need and does not involve many legal formalities in its operation. You have the ease of reporting the income from business and payment of any tax in your personal tax returns.
If two or more persons are jointly operating a small business enterprise without potential business liabilities, a general partnership is ideal. Like that of a sole proprietorship, a general partnership is also easy to form and operate. The income from business can be reported through the partner’s tax returns. You may have to file an information return on the business activities apart from that of your tax returns.
The issue with the business structures cited above is that the business owner’s personal liability is unlimited. Any liability or debts arising from the business is the proprietors or partners responsibility and their personal property is open to appropriation to settle business debts. The solution to this is by setting up a business structure that limits business owner’s personal liability to business obligations. Corporations and Limited Liability Companies are designed to just that.
If you are operating a small business that involves considerable business risks and has potential for future liabilities, form a llc. As business structure formation is governed by state statutes, you will have to check with the government agency handling business registrations for setting up an llc in your state. Starting an llc is relatively simple and straight forward. You have to file an Articles of Organization with the state agency and pay filing fees. It is as simple as that. The Articles will contain all the basic information about your llc. Most states have the Articles in a standard form with instructions on how to fill the form. Another important item is an llc operating agreement. You have to prepare and adopt an operating agreement for your llc stating its organizational structure and functionalities. In some states this is a mandatory requirement for starting an llc.
