Tips for Starting a Business

Starting a business can be an overwhelming process. Here's a guide to the different kinds of businesses you can establish to make the process easier for you.

There are several types of businesses and it is important to choose which one to use carefully. The type of business you choose to establish will affect how you pay taxes and the legal status of the business. The most common types of business are the corporation, S corporation, partnership, sole proprietorship, and LLC.

After the jump, I explain the types of businesses you can form and their pros and cons.



Corporation: Legally, a corporation is a separate entity that is treated much like an individual would be. A corporation can own property and open a bank account. A corporation is owned by its shareholders and is led by a board of directors.

Pro: Shareholders cannot be held personally responsible for the debts and liabilities of the corporation. If the corporation goes into bankruptcy, the owners will not be forced to pay any of the corporation’s debt.
Con: A corporation’s profits are taxed on two levels. First the corporation pays tax on its corporate income, and then it distributes that income to its shareholders who must pay income tax on those dividends.

As an alternative, some people choose to start S-Corporation. An S-Corp is legally the same as a regular corporation except that the profits pass through directly to the owners so only income tax is made on them.
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Sole Proprietorship: This is the least complicated form of business and a common one among small business owners. This may be because you do not need to file any formal legal documents to be a sole proprietorship, just simply be the sole owner of your business. Since you are the sole owner, all of the business’ profits go to you and you are liable for all of the businesses’ debts.

Pros: You have total control of your business and do not have to answer to shareholders or a partner. There are also tax advantages.
Con: It can be hard to run a business by yourself. Raising funds for business operations is hard when you don’t have shareholders and managing all those operations is difficult without a partner sharing in the responsibility.

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Partnerships: A partnership is a business where two or more people equally own, run and manage a business. All partners share in the profits and losses of the business.

Pros: Having partners allows people to delegate responsibilities and manage different areas of the business. They are also inexpensive to form.
Cons: You and your partners have personal liability for your business. Partners may also disagree, which can lead to the disintegration of the business.
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Limited Liability Corporation (LLC): Becoming increasingly popular these days, LLCs are a mix of partnerships and corporations. LLCs are “limited liability”, so owners don’t have any personal liability for the debts that the business occurs but the LLC is taxed in the same way as a partnership would be.

Pros: Optimal flexibility.
Cons: While a corporation can exist for as long as the business is operational, an LLC must be dissolved as soon as one of its members leaves.

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Whichever choice ends up being right for your business, it is important to consult a lawyer. A legal professional can advise you of the tax and legal intricacies that go along with starting a business and help you draw up the necessary paperwork. If you are opening a business, call the office today at 718-317-5007.

- Kevin McKernan