By Markey Read

Some would say starting a business is as easy as having a good idea. But, once you have the idea, there are many legal and financial considerations. Talking to legal and financial professionals can help you make some clear choices before you start.

Attorney Karen Stackpole, of Hoff, Curtis, Pacht, Cassidy & Frame, PC, asks clients three basic questions: How much liability do you want to assume personally?, How many people will be owners? and How will you manage the daily operations?

Certified Public Accountant Colleen Montgomery, with Montgomery & Merrill, CPA, asks: What kind of Tax Liability do you want? and How fast do you expect to grow?

The different forms of legal and financial structures for companies are :sole proprietorship, corporations (s corp. and c corp.), and a limited liability companies. All of these options provide varying degrees of legal and financial liability protection between you and your company.

From a legal and financial standpoint, liability is one of the most crucial issues to address. Stackpole notes that “if you have a lot to loose personally and have a high liability business, you need to have the strongest shield possible between you and your business.”

Some examples of high liability businesses are: restaurants, bars. nightclubs, adventure travel, recreation facilities, hotels, transportation, and manufacturing. Service businesses tend to be the lowest liability businesses.
The newest legal entity, Limited Liability Company (LLC), offers the most protection and the lowest level of management involvement. A LLC allows many people to be owners or “members” and limits their liability to the amount each has personally invested. It also prohibits those owners from being involved with the daily operations.

Stackpole cautions clients who want to start LLC organizations. “The name implies a high level of liability protection, but it is not necessarily true. Ultimately, no legal entity can offer complete protection, so be careful about LLCs,” she notes.

Corporations provide the next level of liability protection and come in two forms: S Corporations (S Corp.) and C Corporations (C Corp.). Both offer a shield between personal assets and the corporation’s assets; both have share holders, and both can have multiple owners. The primary difference concerns tax liability.

An S Corp. can include up to 75 owners or “shareholders” and taxes the corporation’s income only once. Colleen Montgomery, a Certified Public Accountant with Montgomery & Merrill CPA, notes that “with a S Corp. taxation occurs only at the individual level. The company’s profit or loss is ‘passed-through’ to the shareholder’s personal income tax returns,” either increasing or decreasing the shareholders’ personal income level. She adds that an S Corp. takes more capital from the company, and advises against S Corps if the company requires a lot of capital to function.

A C Corp. allows for more than 75 shareholders and taxes the income at the corporate level and at the individual shareholders’ level. Montgomery recommends C Corps for companies that expect to grow quickly and include many investors or shareholders.

Montgomery says that “The S Corp. is the most common form of corporation [in Vermont] because it provides some protection, but does not double tax the corporation’s income.”

Stackpole notes that many “business partnerships” are actually S Corps and the owners are the Shareholders, who gain or lose personal income according to the profits; Directors, who are responsible to the shareholders; and Officers on the Board of Directors, who are responsible to the Directors of the management of the company. Within a two or three-person S Corp., the owners are Shareholders, Directors, and Officers simultaneously.

The other business entity, Sole Proprietorship, offers the least protection and is the simplest form of business available. A Sole Proprietorship allows for only one owner and requires the owner to file an additional form, the Schedule C, with her/his income tax returns. This means that whatever profit or loss the entity produces directly effects the individual’s income tax level.

When starting a business, many business owners do not know how fast a company is going to grow and exactly how that will effect the tax liability of the owners. The good news is, that business owners can change the form of their businesses with the changing needs of their company. Always consult the appropriate professionals before making a significant change in order to take all the variables into account.