You’ve toiled with the idea of leaving your 9-5 desk job to pursue your passion, and you finally feel ready to take the plunge. No more punching the clock for you! You’re going to give your notice, walk out the front door of your office and… do what, exactly?
The first step is a crucial one, but it may be something you’re not very familiar with. The term you’re looking for but may not know is business formation. This means that you’ll need to determine the structure of your business to determine the personal liability of its owners. Whether you’ll be a Sole Proprietor, Limited Liability Company (LLC), Partnership or Nonprofit, you’ll need to sit down with an attorney to understand how the formation works, and it could affect you in the long run.
But what do each of these legal structures mean and how do you know which to pick? Read on to discover which direction your business should take.
1. Sole Proprietor
Your friends have always said you made the most beautifully decorated cakes in town, and now you’re ready to take those praises to the bank and become a professional baker. Congratulations! You are now a sole proprietor. The important thing to remember here is that you will completely own the unincorporated business—and be personally liable—for the debts the business incurs. But what does it mean to be unincorporated? It means that legally, you won’t have to register with the state to be a sole proprietor; you and your business are one and the same entity.
But remember: being the one calling the shots comes with advantages and disadvantages. While you might enjoy being in control of the business and taking in its profits, you’ll also be the one to deal with the consequences if something goes awry.
You might make the most beautifully decorated cakes in town, but your friend makes incredibly flavorful cakes that compliment your designs. The two of you decide to go into business together and form a partnership. You’ve picked a name, registered your online domain, and now you both are ready to take on the baking world.
The next steps are crucial ones. You’ll need to create and sign a written partnership agreement, which an experienced business attorney should help you do. This document will include your business name, the responsibilities you’ll have, and many other complicated items. You must then register your business with the Secretary of State’s office by filing a certificate or registration, also known as a Limited Liability Partnership (LLP).
3. Limited Liability Company (LLC)
Let’s say you and your partner are incredible bakers, but you have no idea how to market your business; you then ask another friend with experience in the field to join your company and form a company. It sounds exciting, right?
It definitely can be! But you need to understand what forming an LLC means for you and your partners. In its most basic form, an LLC protects you all from losing all of your assets—your home, your car, and personal investments—if anything were to happen to the company. Keep in mind that with an LLC, all partners are responsible for its state and federal taxes.
Speaking to a New York business attorney is something you all must do, and the first point of that conversation should be drafting an operating agreement. It will help establish profits and losses amongst the partners, voting rights of each member and much more.
If you are the same baker who decides to use your talents to make a difference in the community, then forming a nonprofit might be the way to go. You might want to speak to a business attorney about the benefits of starting an incorporated nonprofit, which would allow you to take advantage of certain tax breaks.
But before you get ahead of yourself, go ahead and choose a name for your nonprofit and talk to a New York business attorney about register the name. We can also help you learn where to incorporate your nonprofit, create Articles of Incorporation and apply for a tax-exempt status. Finding a Director and a Governing Board are also vital steps in forming a nonprofit.
At the Law Office of Richard Roman Shum, business formation cases are one of our favorite cases to take. Richard Shum knows exactly what it takes to start a business and can help you achieve your dreams in the smartest way possible. If you’d like to set up a free consultation, contact the office here.