Format Options For Business Formation
Business Formation is the process of creating the legal structure necessary to start a new business. The first step in business formation is deciding upon the type of business. There are several options available, each with its own set of specific legal requirements.
- A Sole Proprietorship is the simplest type of business formation. As the name implies, there is only one business owner. The owner may use his own name or create a business name that he will “do business as” (DBA). Either way, the owner and his personal assets can be held liable in the event of legal action.
- A Partnership, also relatively simple in its business formation, involves several individuals who come together to create a business. Profits and losses are shared by the partners and each partner is held liable for the actions of the business.
- Limited Liability Company (LLC) business formation requires a working knowledge of business law. In this format, profits and/or losses are dispersed through the company to the owners (members). The LLC designation also provides limited liability protection for the members.
- A Corporation is the most involved and expensive type of business formation. This format requires an in depth knowledge of corporate law, state regulations, and IRS requirements. There are two types of corporations, C and S. In a C corporation, profits and losses are retained at the corporate level and taxes are paid on earnings. In addition, shareholders are taxed on corporate dividends. In an S corporation, profits and losses flow through the business to the owners. Both types of corporations provide limited liability for the owners.
Business Formation Based On Purpose
The next step in business formation is to decide whether the business designation will be For Profit, Nonprofit, or Not-For-Profit.
- A For Profit business or organization operates in the private sector for the purpose of making money. Retail stores, restaurants and insurance companies are all examples of for profit businesses. A For Profit business impacts the overall economy through taxes paid and employment opportunities offered. All are subject to corporate tax laws.
- A Nonprofit, usually referred to as an organization or agency, has as its mission the betterment of the community. While not always a charitable organization, a nonprofit must use any funds, earned or donated, above its operational costs to further its mission. Nonprofit status is determined by specific IRS guidelines. Examples of nonprofit organizations include churches, charitable organizations, social clubs, and trade or credit unions. A nonprofit organization is generally income tax exempt and expenses are deductible.
- A Not-For-Profit is a type of nonprofit organization which operates solely for the enjoyment of its members, rather than for profit or community improvement. Hobby groups (quilting clubs) and community athletic groups (softball leagues) would be included in this category. Not-for-profit expenses are not deductable.
While it seems that these last two designations could be, and often are, used interchangeably, the IRS distinguishes one from the other by its purpose in order to determine tax status.
Business Dissolution – Closing the Doors
Business Dissolution is as detailed as business formation. Specific guidelines, each with its own set of legal documents, must be followed. Generally, there are six steps in business dissolution.
- Owners, administrators, and/or shareholders of the organization must all approve the business dissolution.
- A Certificate of Dissolution must be filed with the state or states in which the business operated.
- Federal, state and local tax forms must be filed.
- Creditors must be notified of the business dissolution.
- Any outstanding creditor claims must be honored.
- Any remaining assets must be disbursed and these disbursements must be reported to the IRS.
The intricacies of business formation and business dissolution can be overwhelming. Hiring a knowledgeable professional removes confusion and uncertainty from the process. For more than 15 years, DA Consulting Services has helped businesses, large and small/for profit and nonprofit, begin and end in a systematic, stress-free manner.
Contact us today for more information on our Business Formation and/or Business Dissolution services.