In Part 1 of “Tips for Starting your Own Web Development Business,” I gave thirteen tips to consider when you want to start your own business. When you start a small business, one thing you want to consider is implementing one of the many business organizations entities available, so that you can, to some extent, protect yourself from personal liability. Though each country has their own business entities, many have similarities. When you have a business, even the most cautious business owner can encounter legal issues; therefore, it is imperative to be equipped and prepared if any legal action is taken against you. Selecting the type of business organization for your business is of the up most importance, and you should seek legal advice from an attorney and tax advice from an accountant. This is not legal advice, and you should seek legal advice when you consider opening a business; but this post is a list of options available to you to consider when you want to put in place some protection. Moreover, you must be aware that you are not always 100% protected from liability, no matter what business organization you select, but many can significantly limit your personal responsibility.
There are advantages and disadvantages to incorporating your small business, and for us, it was not necessary to incorporate at first, because our business was not large enough. We started as a sole proprietorship, but as we grew, we wanted to protect ourselves and our assets from personal liability, so we decided to incorporate our business as an LP. You need to decide what is best for your business, but you can change the business organization of your company as it grows, so you do not have to incorporate immediately. A common scenario is for small businesses to start out as sole proprietorships or partnerships and become incorporated at some later date when the business has grown. Now when I say incorporate, I do not necessarily mean making a full-fledged corporation, but rather there are other options available to you that can protect you from personal liability and be easier and cheaper than incorporating. Below find a list of business organizations, with a description of each. I hope you find this helpful, but remember to seek legal and economic advice any time you plan to incorporate! Feel free to comment!
A sole proprietorship is the simplest business entity available, and it is the organization most businesses start out as. Most freelance web developers are sole proprietorship, which means they own and manage the business on their own, and they act as the identity for the business. In fact, most governmental entities view the business and the business owner, in sole proprietorships, as one in the same. The owner of a sole proprietorship may employ others people to assist in the operation, but he alone is accountable for the business itself. The owner of this particular business entity has complete and limitless personal liability of all of the debts sustained by the business, so there is no legal protection granted. Also, the incomes and losses are calculated on the owners personal income tax form.
Generally, there are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships.
A general partnership is a business entity where two or more people work together for the common goal of managing and operating a business and making profit, and they usually use a partnership agreement to decide specifics as to the business. Just like the sole proprietorship, each partner has complete and limitless personal liability for all the debts incurred by the business, which means either can be sued for the whole debt. Unlike the sole proprietorship, the income and losses of a general partnership are recorded on a partnership income tax form.
A limited partnership is a business entity that is made up of at minimum one general partner and at least one limited partner. The general partner is the same as the partner in a general partnership, whereas the limited partner acts solely as an investor who contributes money, but does not have power over the management, nor do they have responsibility for the business. A limited partnership is a business entity that allows a person to contribute to a business partnership and share its earnings, without actually having personal liability to creditors.
Limited Liability Partnership
A limited liability partnership is a mixture if partnerships and corporations. It shares many of the same characteristics of a general partnership; however, the partners are not responsible for the misconduct or mistakes of the others partners, thus giving them limited liability. Unlike corporations, in all types of partnerships and sole proprietorships the partners and business owners are able to manage the business on their own, rather than having a group of shareholders.
LLC (Limited Liability Company)
Though commonly confused as corporations, limited liability corporations (LLCs) are actually not corporations at all, although they do supply limited liability protection to its members. The Internal Revenue Service usually does not recognize LLCs, and they are actually regulated by the states. LLCs are essentially a fusion of a partnership entity and a corporation entity, and are very popular among businesses because they get the limited liability of a corporation and the taxing if a partnership. In corporations, the shareholders own stock; however, with LLCs the members hold membership interests in the business and control the management, as well. Many states only require one member to open an LLC, and they can be formed by filing the Article of Organization with the Secretary of State of your state.
A corporation is a commercial business entity that offers limited liability to its members, but is actually a completely separate legal body from its members. A corporation is owned by multiple shareholders, but the shareholders have no control in the administration of the company. A corporation is actually controlled by a board of directors, which hires the management for the company. To a certain degree, corporations provide defense from personal liability for its shareholders; therefore, the shareholders are not held personally accountable for the debts and liabilities of the corporation. If the corporation is sued or has debts, only the corporation’s property or profits can be seized for compensation, but in most cases, the assets of the shareholders cannot be taken. The income and expenses of the corporation are documented on a corporation tax return and the taxes are paid by the corporation itself.
As you can see, there are many business organization options available to you, if you want to start your own web developement business. This information comes from the business classes I have taken, but there is so much more information out there on this topic! Please see the following links for further reading: