Choosing the right form for a small business

Choosing the right form for a small business

| Nov 9, 2020 | Business Formation |

Many entrepreneurs in Georgia look forward to the day when they will be able to operate independently as the head of their own small business. Turning the dream into reality can, however, require some important decision making. This post is too short to review all of the important decisions that a business owner must make before opening the doors, but one or two that are required of all business owners can be usefully reviewed.

Deciding on the form of the business

Many entrepreneurs are filled with ideas for their new business, but they are not always aware of the different kind of business forms that are available and which one best fits their business plan.

Most business owners want to operate as a formal legal entity, one that will protect their personal assets from claims of third parties and will also facilitate the raising of capital. Georgia laws provide two kinds of legal entities that will accomplish these goals: a corporation and a limited liability company (“LLC”). The traditional corporation generally has a more formal structure than an LLC. A traditional corporation is formed by filing articles of incorporation with the secretary of state and then adopting by-laws that govern the day-to-day operations of the company. A corporation’s board of directors is responsible for operating the company, and it must decide on various corporate actions at its regular meetings.

The LLC was created to afford the business owner limited liability against third party claims and to avoid two levels of income taxation. An LLC can be formed by filing the articles of organization with the secretary of state. After the articles have been filed, the managers of the company will execute a management agreement that specifies the responsibilities of the various members of the company.

Raising capital

A business owner who anticipates the need for significant amounts of capital may wish to consider using the traditional business corporation. To raise money for a corporation, the company merely sells shares of stock to investors. The sale of stock can raise other issues, such as complying with state and federal securities regulation, but the mechanism for raising capital is very simple.

An LLC usually adds new members to the management structure of the firm in order to raise capital. This step may require rewriting or significantly altering the management agreement.

Taxes

The income tax consequences of various business forms must also be considered. Unfortunately, even a summary treatment of this complex topic is beyond the scope of this post. Nevertheless, the income tax consequences of business formation should be reviewed with a competent business attorney before the entity is formed.