Congratulations! You've decided on a name for your business. Now, you must decide which legal structure is best for it. There are five common forms of corporate organization in which you can set up your import/export enterprise: the sole proprietorship, the partnership, the corporation, a limited liability company (LLC), and the subchapter S corporation. Each form has specific advantages and liabilities. To decide which form will serve you best, ask yourself the following five questions, and then consult with an attorney:
- How big do you aspire to become?
- Are you willing to risk personal assets for your business?
- Are you willing to grow your business alone?
- Are you in this for the long haul?
- Are tax savings important to you?
If you know your priorities and your preferred operating style, you'll be well-placed to discuss your options with your attorney and accountant to determine which organizational form will best support your business objectives. Here's a quick course on the five forms and their advantages and drawbacks:
The sole proprietorship. If you plan on keeping things small, prefer not to share ownership with anyone else and will be dealing in relatively simple, safe products or services, then a sole proprietorship is the way to go. A sole proprietorship is usually taxed on income, property, and payroll. A typical sole proprietorship might be a neighborhood flower shop, hot dog stand or jewelry shop.
Since it is the sole proprietor's job to run the business, he or she is taxed for that job by way of his or her personal income. Since the sole proprietorship is smaller in size than a corporation, you can expect taxes to be lower. A sole proprietorship can easily be kept confidential and dissolved whenever desired, provided all of its financial obligations have been satisfied.
The downside of this corporate form is the unlimited liability you incur. Since your sole proprietorship is not legally recognized as an independent entity apart from your personal assets, it can be used to satisfy creditors if you run into serious financial difficulties in the course of your business operations. Also, the price you pay for your independence is unlimited responsibility -- you wear ALL the hats by yourself! This is perhaps the best reason for limiting the size of your company, too. Think through what kind of commitment you're willing to make before you choose this form.
A sole proprietorship is usually established simply by filling out a standard business form purchased from an office supply store, or you might conduct a search online to find the appropriate form. Include your name, notarize it and send the form with a check (cashier's or certified) or money order to your county clerk's office. Call the office or your local chamber of commerce to verify that this is the right procedure and to find out the amount of the fee. To protect your new business, it is prudent to run a classified ad in the business section of your local newspaper announcing the launching of your enterprise, along with its assumed name and location.
The partnership. If you prefer to share liability, responsibility, and profits with another person, then a partnership is for you. As with a sole proprietorship, you will be taxed on an individual basis for your share of the partnership, but you will need to expend legal fees to have your articles of partnership drawn up. Many people prefer the security a partnership can offer, but keep in mind that a partnership is very much like a marriage: everything that happens to one of you, good or bad, impacts both of you. Also, if your business partner walks out on you, it's as bad as or worse than being dumped by your spouse, especially if the terms of dissolution have not been negotiated at the outset of your relationship -- your whole livelihood could be wiped out!