Starting a business is a serious endeavor that opens you up to many new legal considerations. Be prepared for your initial meeting with an attorney by learning about key commercial-entity concepts.Sole ProprietorshipYou are a solo practitioner who's been baking and giving away cakes for years. Now people are offering you money to bake more. In this situation, if you are simply sticking to making cakes in your home kitchen without much fanfare, it may not be necessary to establish a formal entity.
Typical Sole Proprietors- Small business- Operating with minimal frills- Comfortable taking on personal financial riskPartnership
You've spent a few years as a sole proprietor. Orders have steadily streamed in, and you've hired additional workers. After borrowing your neighbor's van to deliver a wedding cake for your first out-of-state customer, you realize that this relationship could help grow your operations. This might be the time to set up a partnership. Here you and one or more individuals will agree to share ownership of the business. The proportional share of ownership is decided by the partners. Depending on your state, partners may equally share risk or proportionally share risk according to their agreement. Although it's tempting to rely on a friendly handshake to seal the deal, with so many considerations, it's important that both parties have an attorney review their agreement.
Typical Partnerships- Individuals who've chosen partners they're likely to work well with both professionally and personally- Colleagues who have invested both time and capital into the business- Partners who are willing to be personally open to liability
Limited Liability Company
The cake-selling partnership has been booming, and you and your neighbor agree that it is time to set up a storefront. While the partnership worked when you were in your own kitchen, setting up a commercial kitchen requires permits, contractors, and licenses. Above all, you must purchase insurance. This has you reconsidering if you want to remain personally liable. What if someone were to slip on some icing and sue? Setting up a limited liability company will create a separation between you the person and the commercial entity you operate. In other words, if something bad were to happen, the business would be liable, not you and your neighbor.
Typical Limited Liability Companies- Operate in an industry susceptible to lawsuits- Can be any size- Require less personal financial investment
Corporation
It's twenty years down the road, and you are a Cake Don. In addition to making cakes for all occasions, you have an online baking show, a podcast, and a baking-ware line. All of this is fantastic and you're a millionaire, but your hands ache and you wonder what will happen when you want to slow down. Your family steps in and asks to be involved, pushing you to set up a corporation. This form of business is run by a board of directors who, depending on the type of corporation, may or may not own shares in the company. If you would like to ensure the cake company's long-term success, having a corporate board available to help make decisions is key.
Typical Corporation- Has a larger budget- Can be for-profit or not-for-profit- Must abide by strict regulations if the corporation becomes publicMake sure to work with an attorney to ensure you are maintaining compliance while running a thriving business, no matter the type.
Typical Sole Proprietors- Small business- Operating with minimal frills- Comfortable taking on personal financial riskPartnership
You've spent a few years as a sole proprietor. Orders have steadily streamed in, and you've hired additional workers. After borrowing your neighbor's van to deliver a wedding cake for your first out-of-state customer, you realize that this relationship could help grow your operations. This might be the time to set up a partnership. Here you and one or more individuals will agree to share ownership of the business. The proportional share of ownership is decided by the partners. Depending on your state, partners may equally share risk or proportionally share risk according to their agreement. Although it's tempting to rely on a friendly handshake to seal the deal, with so many considerations, it's important that both parties have an attorney review their agreement.
Typical Partnerships- Individuals who've chosen partners they're likely to work well with both professionally and personally- Colleagues who have invested both time and capital into the business- Partners who are willing to be personally open to liability
Limited Liability Company
The cake-selling partnership has been booming, and you and your neighbor agree that it is time to set up a storefront. While the partnership worked when you were in your own kitchen, setting up a commercial kitchen requires permits, contractors, and licenses. Above all, you must purchase insurance. This has you reconsidering if you want to remain personally liable. What if someone were to slip on some icing and sue? Setting up a limited liability company will create a separation between you the person and the commercial entity you operate. In other words, if something bad were to happen, the business would be liable, not you and your neighbor.
Typical Limited Liability Companies- Operate in an industry susceptible to lawsuits- Can be any size- Require less personal financial investment
Corporation
It's twenty years down the road, and you are a Cake Don. In addition to making cakes for all occasions, you have an online baking show, a podcast, and a baking-ware line. All of this is fantastic and you're a millionaire, but your hands ache and you wonder what will happen when you want to slow down. Your family steps in and asks to be involved, pushing you to set up a corporation. This form of business is run by a board of directors who, depending on the type of corporation, may or may not own shares in the company. If you would like to ensure the cake company's long-term success, having a corporate board available to help make decisions is key.
Typical Corporation- Has a larger budget- Can be for-profit or not-for-profit- Must abide by strict regulations if the corporation becomes publicMake sure to work with an attorney to ensure you are maintaining compliance while running a thriving business, no matter the type.