What are Your Options for Incorporating Your Business?
Female Business Attorney, Female Lawyer Chicago, Female Attorney Chicago, Small Business
When someone is starting a business the initial question I get asked the most is what form should the business entity take. And it’s a great question. There are three main types of entities that you should consider—sole proprietorship, partnership, or corporation. The answer is different for each business owner as each business owner and business is unique.
If you plan on running your business yourself then a sole proprietorship might be the way to go. It is typically the simplest form of doing business. You can easily initiate and terminate the business, but there are some trade-offs. This is not the entity to choose if, at some point, you want to transfer your business or leave it to someone upon your death. This is because there is no recognition of the sole proprietorship as having a separate existence and apart from the owner of the business. If you want to operate as a sole proprietor, no organizational documents are required. You, as the business owner, are responsible for obtaining all required licenses and permits to operate the business. If you are going to operate with a name other than your full legal name, the name requires registration.
The two biggest things to consider with a sole proprietorship is that all business income and loss is reported on your personal income tax return and because a sole proprietorship is not a separate legal entity, you are not protecting from personal liability for the obligations of the business. That’s a big deal. Why? Your personal assets, all of them, could be at risk. However, there are ways to avoid this.
The operation of the business is simplified in a sole proprietorship and is entirely within your discretion. You are not dealing with shareholders or directors. There are no statutes requiring you to have documents relating to the operations of the business. You are the boss!
Another check in the plus column is that if you want to sell your business, because it is not viewed as a legal entity separate from you, you can simply sell the assets of your business. However, it is recommended that you have a written agreement between yourself and the buyer as you may still need to comply with other statutes. Each asset of the business is also treated separately, which has tax consequences for the owner.
At any point if you want to terminate the business there are no documents required. You, as the owner, simply stops operating the business. Now that doesn’t mean that you aren’t still personally liable for the liabilities of the business. I had a client that thought they could just walk away from all the business’s liabilities. This client was forced to declare bankruptcy!
If your business will be part-time or a side hustle, a sole proprietorship could be the answer, but it also depends on what type of business you have. Is it a service business or something else?