What form of business entity
should I use?
Although maybe not the best alternative in the long run, the simplest and cheapest way to
start up a business is as a sole proprietorship. A sole proprietorship means you are doing business in your
individual capacity and not through any type of business entity. You may operate the business in your own name (for
example, John Doe's Painting), or you may operate under a fictitious name (for example, John Doe, doing business
as, or "DBA" Acme Painting). Before legally doing business under a fictitious name, you are required to file a
fictitious business name statement in the county or township where your business is located.
The time tested legal entity to use when forming a business enterprise is the corporation.
A corporation is a legal entity that the law treats as a "person" in the sense that the organization has its own
corporate identity and existence. As a separate legal entity, a corporation serves as a shield between the owners
and third parties doing business with the organization. So long as corporate formalities are observed, the
corporate shield makes it difficult for third parties to "pierce the corporate veil" to go after the owners.
Instead, creditors and other third parties can be limited to going after the assets of the corporation. A
corporation also has its' own name and identity separate from the owners. It pays taxes and has the ability to
contract. It can own property. A corporation can sue and be sued. In some instances, a corporation can be charged
with and convicted of crimes.
Another alternative is a partnership. A partnership is an arrangement involving two or
more people undertaking a business venture as co-owners, with the intent to make a profit. The simplest type of
partnership entity is known as a general partnership. Forming a general partnership is the easiest way to go into
business with another person. But the simplicity of a partnership can be a problem, so careful planning is
important. One of the principal drawbacks of a general partnership is that a general partner can be held
responsible for all debts and liabilities of the partnership. Thus, a general partner with only a one percent
interest in a business could still be held liable for 100% of the debts and liabilities of the partnership. From a
tax standpoint, it's sometimes better to invest in a partnership rather than incorporating.
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