What's the best way to set up a business?

John W. Schoen Senior Producer • Profile • E-mail

Judging from the number of readers who are asking about starting a small business, there's never been a better time to do so. But a lot of people seems to get stuck on the legal paperwork. Michael in Oklahoma is trying to sort out the different forms of corporate ownership.

Which is the best way to set up a new small business, like a gourmet deli: C Corporation, LLC, subchapter S? We'll need to borrow most of the seed money for stock, freezers, etc.
-- Michael M., Oklahoma City, Okla.

We get this one a lot. Unfortunately, there are just too many angles to give a categorical answer.  It’s like asking what’s the best way to build a house. Each business is different, and these different forms of ownership were set up to take those differences into account.

So you really need to see a lawyer who knows the ins and outs of these different business structures to make sure you pick the one that’s right for you.  If you promise to have this handled by a professional, we’ll touch on a few general highlights you’ll want to think about.

Promise? OK, here goes:

The whole idea behind setting up a corporation is to insulate you from certain liabilities like debts, taxes, lawsuits, etc. The corporation, as a legal entity, is still liable, but you aren’t personally. In other words, if the corporation can’t pay its debts, for example, you don’t lose your house.

A corporation is created by filing papers with your state and following certain procedures: naming a board of directors, holding annual board meetings, assigning ownership to shareholders, keeping and filing certain records, etc. One big difference between a C and S Corporation is that an S corporation passes income directly to the owner(s), who report profits or losses on their personal tax returns. A C corporation files its own return -- which can mean you pay taxes twice: once as a corporation and again after the corporation pays you income or dividends.

An LLC, or limited liability company, operates under a different set of rules, but as the name implies it still limits your liabilities. It also can give you more flexibility – there are fewer restrictions on ownership, for example. On the other hand, if you want to sell your stake in an LLC you have to get approval of the other owners, which shareholders of corporation don’t usually have to do.

Picking the right one means matching the rules and procedures with your situation. So find someone who’s set up hundreds of these, and then let them ask the questions.  The money you save will more than pay their bill.

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