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Ask The Experts: Business Legal Structure
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Q: My friend and I have decided to open an Internet marketing consulting company. I would like to make sure everything is in order before going into business with someone else. We also have no money to invest, and we’d like to do as much of the startup work as possible. I’ve noticed that there are many partnership agreements online. Can you please recommend one that we should use and advise us about any other steps we should take? We are thinking of incorporating when we start making money.
A: There are only two options I suggest for your business legal structure.
The first option is a limited liability company in which you file taxes as a partnership. The second option is forming a corporation.
I strongly advise against anyone operating as a general partnership because of the joint individual liability for the acts of the business and your partners.
As for the choice between an LLC and a corporation—that’s not a simple question to respond to without more information about your revenue and profit projections. Put simply, nobody can suggest which entity is best without knowing what your financial situation will be.
However based on the description you gave about your business, my gut reaction is to suggest you begin by forming an LLC. That will likely be an appropriate starting point for you if you think your taxable profits will be less than $35,000 or $40,000 in the first year or two. After you pass that mark, a corporation might be more advantageous. If so, you can convert the LLC to a corporation.
To set up either the LLC or corporation, my first suggestion is for you to purchase a book on how to form your own LLC (or corporation as the case may be). I like one published by Nolo Press. This will give you all of the forms and information you need to set up the entity. Even if you use an outside service, this will give you the knowledge to properly administrate the entity.
The legal documents you will need are determined by the type of entity you choose. If you become an LLC, you will need a membership agreement (which in essence is the partnership agreement) and a buy-sell agreement (which can be incorporated in the membership agreement). If you incorporate you will need bylaws, a stockholders agreement and the buy-sell agreement.
To learn more about choosing the right business legal structure, you might want to check out these NASE resources:
- Taxes
- Marketing
- Financial issues
- Employee relations
- Accounting rules
- And much more
Read this article in PDF form here.