You have spent months, perhaps years, developing a business idea. Now, you are ready to take the first steps toward becoming a bona fide business. These first steps are very important — what you decide during the business formation process could make or break your business. You and your business formation attorney must consider all of the options and make the choices that best fit your business goals.
Choosing a Business Entity
The first step is to determine your business structure. Every business structure has advantages and disadvantages that you will want to carefully consider. Your business entity choices include:
- Sole proprietorship: In a sole proprietorship, one person maintains complete control of the business operations. There are fewer legal requirements than other business entities; however, the sole proprietor is personally liable for business debts.
- Partnership: Two or more people own a general partnership, which can include general and limited partners. Usually, general partners are equally liable for business debts and have equal management powers.
- Limited liability company (LLC): In an LLC, members are usually not liable for business debts. An LLC operating agreement determines who manages the company. There are very specific requirements to meet before an LLC can be created or dissolved.
- Corporation: There are two types of corporations, the S-Corp and the C-Corp, which have different tax structures. A corporation's structure is usually complex, with multiple requirements. There are shareholders (owners who are not liable for debts), officers (managers of day-to-day operations) and directors (managers of officers and the company).
Setting Up Your Business
Depending on the business entity you choose, there are certain legal requirements you must meet before you open your doors. For example, you may need to:
- Select and register a business name
- Register with the Maryland Department of Assessments and Taxation
- Register with the IRS for an employer identification number
- Register your trade name
- Determine whether there are any zoning issues that impact your business
Apply for a Maryland business license and other necessary licenses/permits
Family Business Considerations
There are many advantages to running a family business, such as a higher level of trust between owners/partners/members. Of course, a family business also has its own challenges to consider. For example, a business dispute can have a significant impact on your family and vice-versa. Furthermore, you will need to consider what will happen to the business if a partner leaves.
Now is the time to clearly define everyone's role in the business (who will make what decisions?), determine the business' vision, plan out what will happen in case of a business dispute or family dispute (such as a divorce), create a succession plan, determine a fair compensation plan, and devise an exit strategy.
If you are starting a business, speak with an experienced Maryland business law attorney who can help you determine which entity would be best for your business, how to set up that business entity and how to minimize conflict.