Smart Structure Can Help Build Business Success
Successful business people have a wealth of insider tips and insights that Hillsborough County can help you tap. We've asked local business experts to share their experiences and expertise on the entrepreneurship journey. In this edition we discuss why the structure of your business matters.
James M. Chittenden
Consulting Outreach Manager and Small Business Consultant with Hillsborough County Economic Development
Businesses are started every day in our community, our country, and all over the world. New business owners routinely puzzle over whether or not to form corporations, and if they do so, when. Commonly asked questions include the following:
Why does the way you legally structure your business (sole proprietorship, limited liability company, partnership, corporation) matter?
Legal structure matters if liability protection, professionalization, and future business growth are important to you.
Sole proprietors are simple, less formal businesses. The little girl selling lemonade in her neighborhood or the boy who mows your lawn to make extra cash during the summer are both practicing an elementary form of sole proprietorship.
A sole proprietor is a single owner. There is generally little separation of business and personal funds, and all liability is also personal liability of the owner. Because of this, a bank often cannot be certain if they are lending for business or personal use, so they usually balk at lending to sole proprietors. This limits the growth of sole proprietor businesses.
Partners are two or more proprietors. Expenses, liabilities, and profits are split according to the terms of the partnership agreement. Again, partnerships offer little shield for owners against personal liability.
Corporations and LLCs (limited liability companies) are each a separate entity set up and recognized by a state. They can sue and be sued, enter into contracts, and take other business actions. Generally, they are taxed differently than individuals, and require separate finances, taxes, and formalities such as registration and annual meetings.
No matter what structure you choose, do all you can to keep business and personal assets, liabilities, and finances separate.
What are the three most important considerations in deciding your business model?
(1) Do you anticipate growth? If so, you need a business structure that you can grow with. If you need to hire employees, obtain money from investors or lenders, or open additional facilities or locations, an LLC or corporation may be best. People who plan on staying small, local and independent, or regard the business as more of a "hobby" often operate as sole proprietors.
(2) Are you concerned about getting sued? Doing business as a corporation or LLC generally offers separation of personal assets and liabilities from that of the business. This separation is referred to as a "corporate veil". When a court allows for the personal assets of a business owner to satisfy a judgment, that is referred to as "piercing the corporate veil". No business owner wants this to happen. To minimize this risk, enact written policies prohibiting the use of business assets for personal use, and abide by those policies.
(3) Do you plan to operate in different locations, or even different states? If so, consider a corporation. If your business is registered as a corporation in one state, it is not necessary to register a different corporation in a different state if you are simply opening a new location and hiring employees there. Corporations are a well-established form of business entity, and laws regarding these structures are well-established in each state, and generally resemble those of all other states. However, degrees of flexibility and freedom for LLCs vary from state to state. Additionally, if your business is a complex operation that covers multiple states, people, products, and services, you should certainly obtain specialized accounting and legal advice.
How do you know when it may be time to change from being a sole proprietor to a different business structure?
The short answer is, you will know when you are ready! If you are not at a stage where you are ready to accept customers or make investments in inventory or equipment, consider deferring the effort and expense of changing or registering a new business. However, if you are making and spending money, you should change. If you are involving other people such as employees or partners, you should change. If you will need a significant infusion of money to grow and expand, you should change. If you plan to expand the products and services you will offer, you should change. If you are growing, set up something you can grow with. If you are a cash-starved startup, plan for the business you WILL be, rather than the business you are now. Always game out your plans on paper, making your mistakes there rather than with real money, real assets, and real people. There is plenty of good help available.
The information above is intended to be general information, and not intended as legal advice. Legal help is not required in order to start a business or form a corporation, LLC or other business entity. However, it is recommended, especially in complex situations involving potential partners. We recommend that you consult with a lawyer who could provide legal advice, taking into consideration the circumstances of your specific situation.
Continue Your Journey with these No-cost Resources:
- Florida SBDC at Hillsborough County
- Entrepreneur Collaborative Center
- Operation Startup
- U.S. Small Business Administration
- 1 Million Cups Tampa
Our Expert Contributor
James Chittenden provides one-on-one professional and confidential business consulting to pre-venture and start-up businesses in Hillsborough County. He is a specialist in business startup and business growth. In addition, James facilitates seminars and workshops focused on business formation, business planning, marketing, and business finance. He is also responsible for small business continuity, a field devoted to preparation for natural disasters and other small business disruptions, as well as recovery from disasters or disruptions. James is a former U.S. Marine Corps officer who was responsible for public affairs and marketing for recruiting for half of the United States. Chittenden spent a decade in banking and securities as a financial advisor and business banker offering high net worth individuals and business clients a full spectrum of financial solutions.
James founded OneClickAdvisor.com (formerly known as Triumph Business Services), an online incorporation service, and Triumph Business Communications, a public relations firm. He also authored The Public Triumph: Public Relations for the Strong and Those Who Want to Be.
Chittenden earned a Master's Degree in Business Administration from Boston University. He is also a graduate of Florida State University. Additionally, he is a graduate of the Defense Information School in Ft. Meade, Maryland, where he studied journalism and public affairs.