Practice Areas

Starting a Business

Business Formation - Partnership or Sole Proprietor, Corporation or Limited Liability Company

Many people start businesses without the benefit of legal advice.  They simply hang a shingle and start doing business.  Without the proper business entity, however, they may leave themselves and their families personally liable for judgment or damages from anyone who makes a claim against their business.  Also, if the business is owned by two or more individuals, what happens when you don't agree?  What happens when you want to stop being owners together?  Proper business agreements set out the procedures in advance for "What if's", the keeping of and access to corporate records, and resolving disputes between owners.  Advanced planning reduces stress and animosity and most importantly, legal fees and costs when issues arise.

No one goes into business with someone else anticipating disputes, but disputes do occur between owners, even if the owners are family members.  Many times, we tailor agreements so that court involvement can be avoided entirely.  This saves you money, time and you can keep control of the situation.

As always, we recommend that you are proactive to save time, expense and agony later.  A good idea with multiple owners is a Buy-Sell Agreement, to handle the "what if" we want to break up the company or a partner wants out or dies unexpectedly.

What kind of entity should the company be?

Corporation - an organization formed to carry on business or other activities.  The ownership of a corporation is vested with its Shareholder(s), who are most likely you and your partners, if any.  A corporation can sue or be sued, but the corporation's liability for damages or debts is limited to its assets.  Shareholders and officers are protected from personal claims, unless they commit fraud. 

To form a corporation, Articles of Incorporation must be filed with the Secretary of State's office.  In addition, you will need By-Laws - operating rules for the corporation.  By-laws are especially important if there are multiple shareholders/owners to keep everyone on the same page.  Annual meetings are required of the shareholders and board of directors (you and your partners, if any), and when officers are designated or major decisions are made, they must be documented for corporate records.  In Missouri and most states, an annual report must be filed with the Secretary of State. 

Limited Liability Company – an organization formed to carry on business or other activities.  The ownership of a limited liability company is vested with its Members.  A limited liability company can sue or be sued, but it's liability for damages or debt is limited to its assets.  Members and officers are protected from personal claims, unless they commit fraud.

To form a limited liability company, Articles of Organization must be filed with the Secretary of State's office.  In addition, the LLC will need an Operating Agreement – rules that govern the basic operation of the entity, for example:  how contributions are made, who manages the LLC, what happens if members disagree, who the members are, and the amount of membership interest of each member.  Annual meetings are not required, but the names of officers and any major decisions should be documented for the LLC records.  In Missouri and most states, an annual report is not required.

How will I be taxed?

Note:  These tips are only informational and are not intended as tax advise.  Many exceptions and nuances may apply to each situation.  Please consult a tax advisor.  See Disclaimer.

C-Corporation – Shareholders who actively participate in running the company have a salary with W-2 withholding, and report the salary as earned income on personal tax return.  Profit/Loss is reported on U.S. Corporation Tax Return, which is required, and taxed at the corporate tax rate.  If shareholders take profit, it is reported as a dividend to the shareholder and included on personal tax return.

S-Corporation – Profits/Losses and Draws flow through to your personal tax return and are taxed at your individual rate.  Can be reported through U.S. 1040 Form Schedule C for sole proprietor, or U.S. Partnership return and K-1 for multiple shareholders.

Partnership – Profits/Losses and Draws flow through to your personal tax return and are taxed at your individual rate via a K-1 form.  U.S. Partnership Income Tax Return must be filed.

Sole Proprietor - Profits/Losses and Draws flow through to your personal tax return and are taxed at your individual rate.  Report on U.S. 1040 Form Schedule C.

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