BY WILLIAM J. LYNOTT
Nearly three-fourths of the millions of small businesses in the U.S. are sole proprietor- ships, according to the U.S. Department of Commerce. But is that the best choice for you and your pet business?
That’s a question that you should consider carefully, whether you’re just getting started
or if you’ve been giving some thought to changing your present form of business.
There are four basic classifications of business entities from which to choose: sole proprietorship, partnership, corporation and limited liability company (LLC). Each of these
choices has a set of advantages and disadvantages that need to be carefully considered.
Even if you feel comfortable with your current business entity, you should be familiar with
the legal, financial and practical consequences of each choice.
The simplest and least expensive way to launch a new business is as a sole proprietor.
This choice requires little or no legal expense, no complex tax structure and no one else to
interfere with management decisions.
As a sole proprietor, you may operate under your own name or you may choose a
business name that will be your dba (doing business as) name. Either way, you will need
a business license issued by the municipality or state in which the business will operate.
In most states, that’s your only legal requirement to begin business as a sole proprietor.
As a sole proprietor, profits flow directly through your personal tax return, using a
separate tax form called Schedule C, Profit or Loss from a Business. You get to keep or
reinvest all of the after-tax income produced by your business. If it ever becomes necessary
to do so, a sole proprietorship is the easiest of all business structures to dissolve.
Still, sole proprietorship has its own set of disadvantages. As a sole proprietor, you
bear unlimited personal liability for all debts against the business. Both your business and
personal assets are at risk in the event of legal trouble.
Other disadvantages include possible difficulty in raising funds from outside sources.
Also, operating as a sole proprietor might make it more difficult for you to attract high-cal-iber employees.
As far as most legal and tax considerations are concerned, a partnership is treated essen-
tially the same as a sole proprietorship. While the partnership must file an annual income
and expense report on tax form 1065, each partner is jointly and separately liable for the
financial and tax obligations incurred in the name of the business. Each partner is taxed
on their share of the profits generated by the business.
Keep in mind, however, that business partnerships, like domestic partnerships, do
inject some challenging personal issues.
The choice of a business partner is fraught with potential danger. Some experts suggest
that good friends or relatives rarely work out as business partners because of the inevitable
disagreements over business decisions that can easily turn into emotional issues. So it’s
so important in partnerships to have a clear understanding at the outset of issues such as:
• Who does what? The specific role of each partner should be clearly defined and scrupulously honored.
• On what basis will the partners share in the profits of the business? Will it be 50-50,
or will there be some other arrangement? How will the major financial decisions
be handled? Such issues are extremely important and should never be left “to be
• Also to be considered in the very beginning is what happens if one partner dies. In
such a case, you might find yourself in business with your partner’s widow or widow-
er. “To help avoid this, there are two things you should do,” said Geneva Fulbright,
CPA, in Durham, N.C. “First, consider purchasing key-person life insurance. Then,
with the help of your attorney, draw up a written agreement clearly establishing pro-
cedures for buying out a partner’s interest in the event of death or any other unforeseen
These and other considerations make it unwise to establish a business partnership
without a written agreement drawn up with the help of an experienced attorney.
A corporation is a separate legal entity that carries with it the same rights and responsibilities as those conferred upon us humans. The corporate form of business will limit your
personal financial liability, be more stable in the event of your death, and will probably
make it easier for you to raise money for expansion and growth. However, investigate this
option carefully before you choose it.
One problem is the sometimes-unrecognized differences between large, public corporations and the closely held corporations typical in a small business such as yours. If
you try to swing a loan in the name of your small corporation, you might find that the
lender will require you to sign personally, making you just as responsible for the loan as
you would be in a sole proprietorship. Further, in the event of a lawsuit, you could find
yourself as well as the corporation named as a defendant. So much for the protection of
Will a corporation stand a better chance of survival than a sole proprietorship or partnership in the case of the death of a principal? Usually, but not always.
Many small businesses survive as a direct result of the talents of the
founder and prime mover and shaker. Nowhere would this be truer
than in a demanding pet retail operation. In such a case, if the founder
dies, the business might follow along shortly, regardless of the legal
form bestowed upon it.
Finally, any business owner considering incorporation should be
aware that doing business in that form will introduce complications
that can be a nuisance. Corporations must follow rigid rules, file separate tax returns and maintain specified records. Shareholders must
elect a board of directors and appoint a president. Even if you form a
corporation as the only shareholder, you must name yourself to the
board of directors and appoint yourself as president.
If you are a sole proprietor considering incorporation, you might
have considered using a company that allows you to incorporate over
the internet, taking advantage of some states’ liberal laws regarding
incorporating. It’s an easy and inexpensive way to incorporate your
business; however, there are some disadvantages to keep in mind.
“If a business owner wants to incorporate in a state other than
the one in which the business operates, an ‘authority to do business’
form must be filed in the resident state,” Fulbright said. “That means
two state returns would be required instead of one.”
Also, you should be aware that some states have passed laws
intended to make it more difficult to file incorporation papers in a
When you’re deciding how to structure your business, keep
in mind that the wrong choice could be a costly mistake.
CON TINUED ON PAGE 23
WE'LL BE AT SUPERZOO BOOTH 2652 - SEE YOU THERE!