Since we are concluding 2014, they is usually the time one starts making “New Year’s Resolutions” to improve oneself (be it losing weight, exercise more, becoming a nicer person, spend less money, save more, etc.), one may make a major decision for the New Year. Perhaps its to start one’s own business. Of course one has to make a strategic plan of where to locate, what to sell, how to sell, how to grow and expand, etc., but of course one has to consider a new business should be structured properly, for the best advice contact your local accountant.

The three major structures of a business could be a sole proprietorship, a partnership, or a corporation. The sole proprietorship is the simplest form that can be done, which is that does not have to do any formal and/or legal formation. The business owner, simply starts running the business under his/own name (he/she could file for a “fictitious name” with the local government), but the danger is mixing business with pleasure, and the owner would not know how his/her business is doing, and get lost “in the fluff”. Laos, third-party creditor could go after the business owner’s personal accounts and/or assets on the debts that the sole proprietorship business owes. Basically, the sole proprietorship maybe simplest business formation, but it is the most risky.

The next business formation is the partnership; it is where two or more individuals own a business for profit. When owning a business with another person (be it a relative, close friend, etc.), is advisable to have an agreement and/or a contract, so there is at least a full comprehensive understanding of percentage of ownership, share of profit, who is in charge of what in terms of the business, etc. There are many variations of a partnership, depending if one or more of the partners wants to be fully responsible for the partnership’s business debts. If any of the partners wants to be limited on the partnership’s business debts, then a filing must be made with the appropriate state government official (usual it the secretary of state). If there is no partnership agreement, then the law presumes that every partner is jointly and severally liable for the partnership’s business debts, and every partner is equally entitled to the partnership’s profits and losses. A partnership is just as risky of the sole proprietorship, because one or more partner could be held personally responsible for the partnership’s business debts.

The final business structure is the formal corporation, which is a separate legal entity from its owners; thusly the corporation is only responsible for its own business debts, and the owners of the corporation, called shareholders/stockholders, are only at risk of the money that the owners invested in the corporation. Being that a corporation is a formal legal structure, it must have separate bank and business accounts, and advisable to have a formal accounting system.

Finally, each of these business structures is taxed in a different aspect, which shall be addressed in a future blog. So, if it is on your “New Year’s Resolution List” to start a new business for yourself, please contact us your local orange county accountant at [email protected], and we will guide you to see which business structure is a good fit for your business.