Getting Organized to Do Business

Choice of Organizational Form

Picking a form of organization is one the first challenges facing a new venture. Each form has its advantages and drawbacks. Here are some basic features and benefits to the forms that encompass most of today’s business entities. These comments are general in nature; no action should be undertaken solely on the basis of this or any other article, as situations and circumstances vary widely.

Sole proprietorship

A sole proprietorship is the simplest business form to establish. In essence, there is no “form” as such. That is, the business is not its own entity, separate and apart from its owner. Rather, by selecting to do business in this form, the owner creates a sort of silo within which the business activities take place and are segregated from the owner’s personal activities.

How does one create a sole proprietorship? The steps may differ depending upon the locale, and local business authorities should be consulted to be sure nothing important is overlooked. In general, though, in Washington the steps are straightforward:

• Register with the State by completing and filing a Master Business License Application.
• If the business is to be conducted under a name other than the owner’s own name, then register the “trade name” on the Application.
• If the business will have employees other than the owner, complete the relevant portions of the Application. Filing the Application will register the business with the Department of Revenue as well as classifying the business activities for the appropriate tax rates. It will also, where appropriate, establish an account for the business with other relevant state agencies.
• Check with the local jurisdiction (city, county) to determine what other registrations or business license may be required.

The simplicity of the Sole Proprietorship is alluring. However, there are tradeoffs. For instance, there is no limit to the potential personal liability attaching to the owner from business activities. A customer who is injured on the business premises or by a product may have a claim for compensation, and that claim puts the owner’s personal assets and earnings at risk. Claims arising out of the business may be enforced against the owner personally, including contracted debt as well as claims such as discrimination or other employment matters. Finally, a sole proprietorship cannot be transferred, as it is coextensive with the owner.

To lessen risk from engaging in business, to acquire transferability, to accommodate multiple owners, and more, consider either a Corporation or a Limited Liability Company.

The “C” Corporation

A Corporation, unlike a Sole Proprietorship, is a legal entity that exists separate and apart from its owner or owners. As such, to create a Corporation requires completion of steps prescribed by law. In Washington, a Corporation is formed by filing Articles of Incorporation with the Secretary of State. At a minimum, the Articles set out the corporate name, the number of shares of stock it can issue, the name and address of its initial registered agent and registered office, and the name and address of each incorporator. Further steps to complete the organization of a Corporation include adoption of Bylaws, processing stock subscriptions and issuing shares, as well as filing the Master Business License Application and complying with local registration requirements.

A Corporation, properly established and maintained, in general affords the owners limited liability. That is, with exceptions for fraud or other abuse, the corporate form shields the owners from personal liability or loss beyond the risk of losing all of their investment. The representation of ownership in the form of shares of stock facilitates both multiple ownership and transferability of ownership interests. Finally, unlike a Sole Proprietorship which expires with its owner, a Corporation as a separate legal entity can enjoy perpetual existence.

The Limited Liability Company

The Limited Liability Company (LLC) is also a separate legal entity, and is created by complying with certain steps required by law. It shares several characteristics of a Corporation, such as limiting the risk facing the LLC’s owners (called “Members”), enjoying perpetual existence, and offering at least potential transferability of membership interests.

At the same time, however, it may be utilized to gain greater flexibility than may be available from a traditional corporate structure. One feature that attracts many to this form is the combination of limited liability from certain risk, yet at the same time, allowing taxation to take place at only the Member level. The LLC can be a “pass-through” entity for tax purposes, but a liability-shielding entity offering protections to its Members.

Conclusion

The choice of organization for a new venture is a critically important one. This article has merely scratched the surface of considerations that go into making an informed choice. Please contact Larry for more information.