Do’s and Don’ts: Building a Solid Foundation
BUILDING A SOLID FOUNDATION
You wouldn’t build your home upon sand, gravel or water without the proper foundation. We all know the affects of building upon unsolid ground, the structure will eventually tumble down. Just as you hire a contractor to make sure each dimension of your home’s foundation is sound, so that your family and valuables are protected, you should treat your business the exact same way. If you plan to start a record label, production company, publishing company, modeling agency, shoe store, or clothing line; you want to be sure that your business structure is solid and will protect you and your assets.
If you are like most people, they start businesses to do one simple thing: make money! With this as your main objective, you need to know how to protect your business. The truth is… things do sometimes go wrong even if it’s not your own fault and your business may be subjected to lawsuits or even debt. I receive the most questions on the Sole Proprietorship, Limited Liability Company and Corporation business structures. I will give you a brief description of each and why some choose that business structure.
The Sole Proprietorship (SP) is the easiest to form and takes almost nothing to set up, but easy doesn’t always mean better. This business structure is owned and run by one person and there is no distinction between the owner and the business. The owner of an SP subjects themselves to unlimited liability… meaning if your company gets sued or owes money, you may be going into your personal account and fixing the problem. Not a great thing to think about, but you should know this now. If you decide to start here, you can upgrade your structure to a LLC or corporation later.
The Limited Liability Company or LLC is the most common choice amongst the clients that I have worked with and what I often recommend. This structure does just as it states, it limits your liability. Owners are called members and the member’s personal liability is limited up to your interest in the company, so the profits and losses of the company pass through the company to its owners. Meaning that if you have partners and you all own certain percentages, then you are only liable up to that percentage. For example: KJ owns 40% of Beat Freak Records, LLC, Reshard owns 50% and Jacob owns 10%. Kathy gets 40% of profits and in the event of a loss, Kathy suffers it at 40% and so on. The LLC can be formed in every state, usually through the secretary of state with a minimum filing fee and other renewal requirements each year. You and the other owners may want to consider drawing up a partnership agreement as well.
The Corporation is the most difficult business structure to form. It requires you to file corporate organization forms and submit a filing fee, usually with the secretary of state. You will also need a board of directors, who oversee the corporate business, and shareholders, who own a specific number of shares. Similar to a LLC, owners have limited personal liability for the debts and actions of the LLC. The major difference between LLCs and corporations is how they are taxed. The profit of a corporation is taxed to the corporation and to the shareholders when distributed as dividends, this creates a double tax.
Of course there is a ton more to know, but this should help you get started. Build your company on a solid foundation!
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Written by: LaQuita R. Stokes, Attorney at Law
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