STARTING A BUSINESS

Small Business Administration

STARTING A BUSINESS FAQ’s

How do I get a small business loan?

You should prepare a business plan, including your loan proposal, and submit it to a local lender. If the lender is unable to approve your loan, you may request that your application be submitted, by the lender, to the SBA. The SBA can guarantee up to 80% of a small business loan; however, the lender must agree to loaning the money with the SBA guarantee. The lender will then forward your loan application and a credit analysis to the nearest SBA District Office. If the lender needs SBA applications and/or guidance it may contact the nearest SBA District Office by going to SBA. Upon SBA approval, the lending institution closes the loan and disburses the funds.

For further information and eligibility requirements, please go to www.sba.gov and click on "Financing."

How do I get a small business grant?

At this time, Congress has not set aside any monies for grants to start and/or expand a small business.

SBA does provide a loan guarantee program for loans made by your local lender. The SBA guarantees loans that the lender could not normally approve. However, all funding is handled through your local lender.

For information on this program and all of the SBA's financial assistance, please go to www.sba.gov and click on "Financing."

How do I get started in a business?

The U.S. Small Business Administration (SBA) provides a wealth of information on starting a business at the SBA home page(www.sba.gov) under "Starting." You will find information on writing a business plan as well. You may take advantage of SBA’s resource partners. The Service Corps of Retired Executives (SCORE) and the Small Business Development Center (SBDC) provides free one-on-one counseling to those interested in starting and expanding a business. This includes critiquing your business plan, legal requirements, marketing, and licenses needed for your business. To find the location nearest you, please visit us at SBA and click on your state.

How do I get a business license?

Licensing is generally handled through your state or local government. You will need to consult your local telephone directory in the "Government" section for an office that will assist you with a license or permit. See SBA here.

For FREE one-on-one counseling, please go to SBA's home page (www.sba.gov) and select "Local SBA Resources" for an area local contact nearest you. The Service Corps of Retired Executives and the Small Business Development Center can assist you with your business venture.

How do I write a business plan?

If you go to SBA's home page (www.sba.gov) and select "Starting," you will find information on starting a business and writing a business plan - see SBA here. Under "SBA local resources" you can find local contacts such as the Service Corps of Retired Executives and the Small Business Development Center that provide FREE one-on-one counseling in the area of starting and expanding a small business. They can assist you by critiquing your business plan and your business ideas. You can locate a center by selecting "Local SBA Resources" under www.sba.gov, as well.

What type of collateral do I need for a loan?

Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process but good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of twenty percent (20%) or more of the business are required to personally guarantee SBA loans.

The SBA does not deny approval for a SBA Guarantee Loan solely due to lack of collateral; however, it can be used as a reason in addition to other credit factors.

For more information on requirements on a SBA Guarantee Loan as well as our guarantee loan programs available, please visit us at SBA.

Is there any business assistance available in my area?

Yes. There are 12,400 Service Corps of Retired Executives (SCORE) chapters and approximately 1,000 Small Business Development Centers (SBDC) nationwide. SCORE provides free expert advice based on many years of firsthand experience and shared knowledge on virtually every aspect of business. The SBDC provides a variety of management and technical assistance services to small businesses and potential entrepreneurs. To locate the nearest SCORE or SBDC in your area, please visit us at SBA and click on your state.

GLOSSARY OF TERMS

ACCOUNTS PAYABLE: Trade accounts of businesses representing obligations to pay for goods and services received.

ACCOUNTS RECEIVABLE: Trade accounts of businesses representing moneys due for goods sold or services rendered evidenced by notes, statements, invoices, or other written evidence of a present obligation.

ACCOUNTING: The recording, classifying, summarizing, and interpreting in a significant manner and in terms of money, transactions, and events of a financial character.

ASSUMPTIONS: The act of assuming/undertaking another's debts or obligations.

AUCTION: A public sale of goods to the highest bidder.

AUTOMATIC DATA PROCESSING

1. Data processing largely performed by automatic means.
   
2. The discipline which deals with methods and techniques of automatic data processing.
   
3. Pertaining to data processing equipment such as electrical accounting machines and electronic data processing equipment.
   

BANKRUPTCY: A condition in which a business cannot meet its debt obligations and petitions a federal district court for either reorganization of its debts or liquidation of its assets. In the action the property of a debtor is taken over by a receiver or trustee in bankruptcy for the benefit of the creditors. This action is conducted as prescribed by the National Bankruptcy Act, and may be voluntary or involuntary.

BREAKEVEN POINT: The breakeven point in any business is that point at which the volume of sales or revenues exactly equals total expenses - the point at which there is neither a profit nor loss - under varying levels of activity. The breakeven point tells the manager what level of output or activity is required before the firm can make a profit; reflects the relationship between costs, volume, and profits.

BUSINESS BIRTH: Formation of a new establishment or enterprise.

BUSINESS DEATH: Voluntary or involuntary closure of a firm or establishment.

BUSINESS DISSOLUTION: For enumeration purposes, the absence from any current record of a business that was present in a prior time period.

BUSINESS FAILURE: The closure of a business causing a loss to at least one creditor.

BUSINESS PLAN: A comprehensive planning document which clearly describes the business developmental objective of an existing or proposed business applying for assistance in SBA's 8(a) or lending programs. The plan outlines what and how and from where the resources needed to accomplish the objective will be obtained and utilized.

BUSINESS START: For enumeration purposes, a business with a name or similar designation that did not exist in a prior time period.

CANCELED LOAN: The annulment or rescission of an approved loan prior to disbursement.

CAPITAL:

1. Assets less liabilities, representing the ownership interest in
   a business;
   
2. a stock of accumulated goods, especially at a specified time and in contrast to income received during a specified time period;
   
3. accumulated goods devoted to the production of goods;
   
4. accumulated possessions calculated to bring income.
   

CAPITAL EXPENDITURES: Business spending on additional plant equipment and inventory.

CAPITALIZED PROPERTY: Personal property of the agency which has an average dollar value of $300.00 or more and a life expectancy of one year or more. Capitalized property shall be depreciated annually over the expected useful life to the agency.

CASH DISCOUNT: An incentive offered by the seller to encourage the buyer to pay within a stipulated time. For example, if the terms are 2/10/N 30, the buyer may deduct 2 percent from the amount of the invoice (if paid within 10 days); otherwise, the full amount is due in 30 days.

CASH FLOW: An accounting presentation showing how much of the cash generated by the business remains after both expenses (including interest) and principal repayment on financing are paid. A projected cash flow statement indicates whether the business will have cash to pay its expenses, loans, and make a profit. Cash flows can be calculated for any given period of time, normally done on a monthly basis.

CHARACTER: A letter, digit, or other symbol that is a part of the organization, control, or representation of data used in computer systems.

CHARGE-OFF: An accounting transaction removing an uncollectible balance from the active receivable accounts.

CHARGED OFF LOAN: An uncollectible loan for which the principal and accrued interest were removed from the receivable accounts.

CLOSING: Actions and procedures required to affect the documentation and disbursement of loan funds after the application has been approved and the execution of all required documentation and its filing and recording where required.

CLOSED LOAN: Any loan for which funds have been disbursed and all required documentation has been executed, received, and reviewed. For statistical purposes, first or total disbursement is counted as a closed loan.

COLLATERAL: Something of value - securities, evidence of deposit, or other property - pledged to support the repayment of an obligation.

COLLATERAL DOCUMENT: A legal document covering the item(s) pledged as collateral on a loan, i.e., note, mortgages, assignment, etc.

CONSORTIUM: A coalition of organizations, such as banks and corporations, set up to fund ventures requiring large capital resources.

CORPORATION: A group of persons granted a state charter legally recognizing them as a separate entity having its own rights, privileges, and liabilities distinct from those of its members. The process of incorporating should be completed with the state's secretary of state or state corporate counsel, and usually requires the services of an attorney.

COMPROMISE: The settlement of a claim resulting from a defaulted loan for less than the full amount due. Compromise settlement is a procedure available for use only in instances where the government cannot collect the full amount due within a reasonable time, by enforced collection proceedings, or where the cost of such proceedings would not justify such effort.

CONTINGENT LIABILITY: A potential obligation that may be incurred dependent upon the occurrence of a future event. Two examples are: (1) the liability of an endorser or guarantor of a note if the primary borrower fails to pay as agreed and (2) the liability that would be incurred if a pending lawsuit is resolved in the other party's favor.

COSTS: Money obligated for goods and services received during a given period of time, regardless of when ordered or whether paid for.

CREDIT RATING: A grade assigned to a business concern to denote the net worth and credit standing to which the concern is entitled in the opinion of the rating agency as a result of its investigation.

DATA ELEMENT: The basic unit of identifiable and definable information. A data element occupies the space provided by fields in a record or blocks on a form. It has an identifying name and value or values for expressing a specific fact. For example, a data element named "Color of Eyes" could have recorded values of "Blue (a name)," "Bl (an abbreviation)," "06 (a code)." Similarly, a data element named "Age of Employee" could have a recorded value of "28" (a numeric value).

DEBENTURE: Debt instrument evidencing the holder's right to receive interest and principal installments from the named obligor. Applies to all forms of unsecured, long-term debt evidenced by a certificate of debt.

DEBT CAPITAL: Business financing that normally requires periodic interest payments and repayment of the principal within a specified time.

DEBT FINANCING: The provision of long term loans to small business concerns in exchange for debt securities or a note.

DEED OF TRUST: A document under seal which, when delivered, transfers a present interest in property. May be held as collateral.

DEFAULTS: The nonpayment of principal and/or interest on the due date as provided by the terms and conditions of the note.

DEFERRED LOAN: Loans whose principal and or interest installments are postponed for a specified period of time.

DISBURSEMENT: The actual payout to borrower of loan funds, in whole or part. It may be concurrent with the closing or follow it.

DISBURSING OFFICER: An employee authorized to pay out cash or issue checks in settlement of vouchers approved by a certifying officer.

DIVESTITURE: Change of ownership and/or control of a business from a majority (non-disadvantaged) to disadvantaged persons.

EARNING POWER: The demonstrated ability of a business to earn a profit, over time, while following good accounting practices. When a business shows a reasonable profit on invested capital after fully maintaining the business property, appropriately compensating its owner and employees, servicing its obligations, and fully recognizing its costs, the business may be said to have demonstrated earning power. Demonstrated earning power is the foremost test of the business risk in pressing upon an application for a loan.

EASEMENT: A right or privilege that a person may have on another's land, as the right of a way or ingress or egress.

EMPLOYEE ASSISTANCE PROGRAM (EAP) COORDINATOR: Coordinates the activities of Central Office or regional counselors, maintains a community resource list of available professional assistance to troubled employees, and a current roster of EAP counselors for the area of his/her jurisdiction.

EAP COUNSELOR: Conducts confidential consultations with troubled employees who so request, who are referred for objective analysis of a personal problem, and for identification of the best available assistance and/or professional services needed to resolve the employee's problem.

ENTERPRISE: Aggregation of all establishments owned by a parent company. An enterprise can consist of a single, independent establishment or it can include subsidiaries or other branch establishments under the same ownership and control.

ENTREPRENEUR: One who assumes the financial risk of the initiation, operation, and management of a given business or undertaking.

EQUITY: An ownership interest in a business.

EQUITY FINANCING: The provision of funds for capital or operating expenses in exchange for capital stock, stock purchase warrants, and options in the business financed without any guaranteed return, but with the opportunity to share in the company's profits. Equity financing includes long-term subordinated securities containing stock options and/or warrants. Utilized in SBIC financing activities.

EQUITY PARTNERSHIP: A limited partnership arrangement for providing startup and seed capital to businesses.

ESCROW ACCOUNTS: Funds placed in trust with a third party by a borrower for a specific purpose and to be delivered to the borrower only upon the fulfillment of certain conditions.

ESTABLISHMENT: A single-location business unit, which may be independent - called a single- establishment enterprise - or owned by a parent enterprise.

FINANCIAL REPORTS: Reports commonly required from applicants request for financial assistance, e.g.:

1. Balance Sheet - A report of the status of a firm's assets, liabilities and owner's equity at a given time.
   
2. Income Statement - A report of revenue and expense which shows the results of business operations or net income for a specified period of time.
   
3. Cash Flow - A report which analyzes the actual or projected source and disposition of cash during a past or future accounting period.
   

FINANCING: New funds provided to a business, by either loans, purchase of debt securities, or capital stock.

FLOW CHART: A graphical representation for the definition, analysis, or solution of a problem, in which symbols are used to represent operations, data, flow, equipment, etc.

FORECLOSURE: The act by the mortgagee or trustee upon default in the payment of interest or principal of a mortgage of enforcing payment of the debt by selling the underlying security.

FRANCHISING: A continuing relationship in which the franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing, and managing in return for a consideration. Franchising is a form of business by which the owner (franchisor) of a product, service, or method obtains distribution through affiliated dealers (franchisees). The product, method, or service being marketed is usually identified by the franchisor's brand name, and the holder of the privilege (franchisee) is often given exclusive access to a defined geographical area.

GROSS DOMESTIC PRODUCT (GDP): The most comprehensive single measure of aggregate economic output. Represents the market value of the total output of the goods and services produced by a nation's economy.

GROSS NATIONAL PRODUCT (GNP): A measure of a nation's aggregate economic output. Since 1991 GDP, a slightly different calculation, has replaced GNP as a measure of U.S. economic output.

GUARANTEED LOAN: A loan made and serviced by a lending institution under agreement that a governmental agency will purchase the guaranteed portion if the borrower defaults.

HARDWARE: A term used to describe the mechanical, electrical, and electronic elements of a data processing system.

HAZARD INSURANCE: Insurance required showing lender as loss payee covering certain risks on real and personal property used for securing loans.

INCUBATOR: A facility designed to encourage entrepreneurship and minimize obstacles to new business formation and growth, particularly for high technology firms, by housing a number of fledgling enterprises that share an array of services. These shared services may include meeting areas, secretarial services, accounting services, research libraries, on-site financial and management counseling, and word processing facilities.

INDEPENDENT AND QUALIFIED PUBLIC ACCOUNTANTS: Public accountants are independent when neither they nor any of their family have a material, direct, or indirect financial interest in the borrower other than as an accountant. They are qualified, unless there is contrary evidence, when they are either (1) certified, licensed, or otherwise registered if so required by the state in which they work, or (2) have worked as a public accountant for at least five years and are accepted by SBA.

INDUSTRIAL REVENUE BOND (IRB): A tax-exempt bond issued by a state or local government agency to finance industrial or commercial projects that serve a public good. The bond usually is not backed by the full faith and credit of the government that issues it, but is repaid solely from the revenues of the project and requires a private sector commitment for repayment.

INNOVATION: Introduction of a new idea into the marketplace in the form of a new product or service or an improvement in organization or process.

INSOLVENCY: The inability of a borrower to meet financial obligations as they mature or having insufficient assets to pay legal debts.

INTEREST: An amount paid a lender for the use of funds.

INVERSE ORDER OF MATURITY: When payments are received from borrowers that are larger than the authorized repayment schedules, the overpayment is credited to the final installments of the principal, which reduces the maturity of the loan and does not affect the original repayment schedule.

INVESTMENT BANKING: Businesses specializing in the formation of capital. This is done by outright purchase and sale of securities offered by the issuer, standby underwriting, or "best efforts selling."

INVITATION FOR BIDS: Formal solicitations for offerings to perform procurements by competitive bids when the specifications describe the requirements of the government clearly, accurately, and completely, but avoiding unnecessarily restrictive specifications or requirements which might unduly limit the number of bidders.

JOB DESCRIPTION: A written statement listing the elements of a particular job or occupation, e.g., purpose, duties, equipment used, qualifications, training, physical and mental demands, working conditions, etc.

JUDGMENT: Judicial determination of the existence of an indebtedness or other legal liability.

JUDGMENT BY CONFESSION: The act of debtors permitting judgment to be entered against them for a given sum with a statement to that effect, without the institution of legal proceedings.

JUNK BOND: A high-yield corporate bond issue with a below-investment rating that became a growing source of corporate funding in the 1980s.

LEASE: A contract between the owner (leassor) and the tenant (leassee) stating the conditions under which the tenant may occupy or use the property.

LEGAL RATE OF INTEREST: The maximum rate of interest fixed by the laws of the various states which a lender may charge a borrower for the use of money.

LENDING INSTITUTION: Any institution, including a commercial bank, savings and loan association, commercial finance company, or other lender qualified to participate with SBA in the making of loans.

LEVERAGED BUY-OUT: The purchase of a business with financing provided largely by borrowed money, often in the form of junk bonds.

LIEN: A charge upon or security interest in real or personal property maintained to ensure the satisfaction of a debt or duty ordinarily arising by operation of law.

LIQUIDATION: The disposal, at maximum prices, of the collateral securing a loan and the voluntary and enforced collection of the remaining loan balance from the obligators and/or guarantors.

LIQUIDATION VALUE: The net value realizable in the sale (ordinarily a forced sale) of a business or a particular asset.

LITIGATION: Refers to a loan in "liquidation status" which has been referred to attorneys for legal action. Also: The practice of taking legal action through the judicial process.

LOAN AGREEMENT: Agreement to be executed by borrower, containing pertinent terms, conditions, covenants, and restrictions.

LOAN PAYOFF AMOUNT: The total amount of money needed to meet a borrower's obligation on a loan. It is arrived at by accruing gross interest for one day and multiplying this figure by the number of days that exist between the date of the last repayment and the date on which the loan is to be completely paid off. This amount, known as accrued interest, is combined with the latest principal and escrow balances that are applicable to what is now referred to as the loan payoff amount. In the case where prepaid interest exceeds the accrued interest, the latter is subtracted from the former and the difference is used to reduce the total amount owed.

LOSS RATE: A rate developed by comparing the ratio of total loans charged off to the total loans disbursed from inception of the program to the present date.

LOSS RESERVE ADJUSTMENT RATE: A reserve rate based upon the ratio of the aggregate net chargeoffs (chargeoffs less recoveries) for the most recent five years to the total average loans outstanding for the comparable 5-year period.

MARKUP: Markup is the difference between invoice cost and selling price. It may be expressed either as a percentage of the selling price or the cost price and is supposed to cover all the costs of doing business plus a profit. Whether markup is based on the selling price or the cost price, the base is always equal to 100 percent.

MATURITY: As applied to securities and commercial paper, the period end date when payment of principal is due.

MATURITY EXTENSIONS: Extensions of payment beyond the original period established for repayment of a loan.

MERGER: A combination of two or more corporations wherein the dominant unit absorbs the passive ones, the former continuing operation usually under the same name. In a consolidation two units combine and are succeeded by a new corporation, usually with a new title.

MORTGAGE: An instrument giving legal title to secure the repayment of a loan made by the mortgagee (lender). In legal contemplation there are two types: (1) title theory - operates as a transfer of the legal title of the property to the mortgagee, and (2) lien theory - creates a lien upon the property in favor of the mortgagee.

NEGOTIATION: The face to face process used by local unions and the employer to exchange their views on those matters involving personnel policies and practices or other matters affecting the working conditions of employees in the unit and reduced to a written binding agreement. Used also by contracting officers to reach agreement with potential contractors.

NEGOTIATION DISPUTE: That point in negotiations where labor and management cannot come to an agreement on some or all of the issues on the bargaining table and the services of the FMCS have not been utilized.

NEGOTIATED GRIEVANCE PROCEDURE: The sole and exclusive procedure available to all employees in a bargaining unit and the employer for processing grievances and disputes.

NET WORTH: Property owned (assets), minus debts and obligations owed (liabilities), is the owner's equity (net worth).

NOTES AND ACCOUNTS RECEIVABLE: A secured or unsecured receivable evidenced by a note or open account arising from activities involving liquidation and disposal of loan collateral.

OBLIGATIONS: Technically defined as "amount of orders placed, contracts awarded, services received, and similar transactions during a given period which will require payments during the same or a future period."

ORDINARY INTEREST: Simple interest based on a year of 360 days, contrasting with exact interest having a base year of 365 days.

OUTLAYS: Net disbursements (cash payments in excess of cash receipts) for administrative expenses and for loans and related costs and expenses (e.g., gross disbursements for loans and expenses minus loan repayments, interest and fee income collected, and reimbursements received for services performed for other agencies).

PARTNERSHIP: A legal relationship existing between two or more persons contractually associated as joint principals in a business.

PATENT: A patent for an invention is the grant of a property right to the inventor, issued by the Patent and Trademark Office. The term of a new patent is 20 years from the date on which the application for the patent was filed in the United States or, in special cases, from the date an earlier related application was filed, subject to the payment of maintenance fees. US patent grants are effective only within the US, US territories, and US possessions.

PRIME RATE: Interest rate which is charged to business borrowers having the highest credit ratings for short term borrowing.

PRO-Net: An Internet-based database of information of small, disadvantaged, 8(a), and women-owned businesses seeking procurement contracts.

PRODUCT LIABILITY: Type of tort or civil liability that applies to product manufacturers and sellers.

PROFESSIONAL AND TRADE ASSOCIATIONS: Non-profit, cooperative, and voluntary organizations that are designed to help their members in dealing with problems of mutual interest. In many instances, professional and trade associations enter into an agreement with the SBA to provide volunteer counseling to the small business community.

PROPRIETORSHIP: The most common legal form of business ownership; about 85 percent of all small businesses are proprietorships. The liability of the owner is unlimited in this form
of ownership.

PROTEST: A statement in writing by any bidder or offeror on a particular procurement alleging that another bidder or offeror on such procurement is not a small business concern.

RATIO: Denotes relationships of items within and between financial statements, e.g., current ratio, quick ratio, inventory turnover ratio, and debt/net worth ratios.

REQUEST FOR PROPOSALS: Solicitations for offerings for competitive negotiated procurements when it is impossible to draft an invitation for bids containing adequate detailed description of the required property and services. There are 15 circumstances in the Federal Acquisition Regulations (FAR) which permit negotiated procurements.

RETURN ON INVESTMENT: The amount of profit (return) based on the amount of resources (funds) used to produce it. Also the ability of a given investment to earn a return for its use.

SECONDARY MARKET: Those who purchase an interest in a loan from an original lender, such as banks, institutional investors, insurance companies, credit unions, and pension funds.

SERVICE CORPS OF RETIRED EXECUTIVES (SCORE): Retired and working successful business persons who volunteer to render assistance in counseling, training, and guiding small business clients.

SMALL BUSINESS DEVELOPMENT CENTERS (SBDC): The SBDC is a university-based center for the delivery of joint government, academic, and private sector services for the benefit of small business and the national welfare. It is committed to the development and productivity of business and the economy in specific geographical regions.

TURNOVER (Business): Turnover is the number of times that an average inventory of goods is sold during a fiscal year or some designated period. Care must be taken to ensure that the average inventory and net sales are both reduced to the same denominator; that is, divide inventory at cost into sales at cost or divide inventory at selling price into sales at selling price. Do not mix cost price with selling price. The turnover, when accurately computed, is one measure of the efficiency of a business.

UNDELIVERED ORDERS: The amount of orders for goods and services outstanding for which the liability has not yet accrued. For practical purposes, represents obligations incurred for which goods have not been delivered or services not performed.

UNFAIR LABOR PRACTICE: Action by either the employer or union which violates the provisions of EO 11491 as amended.

UNIFORM COMMERCIAL CODE: Codification of uniform laws concerning commercial transactions. In SBA parlance, generally refers to a uniform method of recording and enforcing a security interest or charge upon existing or to be acquired
personal property.

USURY: Interest which exceeds the legal rate charged to a borrower for the use of money.

VENTURE CAPITAL: Money used to support new or unusual commercial undertakings; equity, risk, or speculative capital. This funding is provided to new or existing firms that exhibit above-average growth rates, a significant potential for market expansion, and the need for additional financing for business maintenance or expansion.

WORD PROCESSING: The efficient and effective production of written communications at the lowest possible cost through the combined use of systems management procedures, automated technology, and accomplished personnel. The equipment used in word processing applications includes but is not limited to the following: dictation and transcription equipment, automatic repetitive typewriters, visual display text editing typewriters, keyboard terminals, etc.

WORKERS' COMPENSATION: A state-mandated form of insurance covering workers injured in job-related accidents. In some states the state is the insurer; in other states insurance must be acquired from commercial insurance firms. Insurance rates are based on a number of factors, including salaries, firm history, and risk of occupation.

BASIC STRUCTURES

Sole Proprietorship

The sole proprietorship is a simple, informal structure that is inexpensive to form; it is usually owned by a single person or a marital community. The owner operates the business, is personally liable for all business debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns.

Limited Liability Company (LLC)

The LLC is generally considered advantageous for small businesses because it combines the limited personal liability feature of a corporation with the tax advantages of a partnership and sole proprietorship. Profits and losses can be passed through the company to its members or the LLC can elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate formalities. Owners are called members, and the LLC is managed by these members or by appointed managers.

General Partnership

Partnerships are inexpensive to form; they require an agreement between two or more individuals or entities to jointly own and operate a business. Profit, loss, and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return. Short-term partnerships are also known as joint ventures.

C Corporation (Inc. or Ltd.)

This is a complex business structure with more startup costs than many other forms. A corporation is a legal entity separate from its owners, who own shares of stock in the company. Corporations can be created for profit or nonprofit purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed both at the corporate level and again when distributed to shareholders.

Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to do so may open the shareholders to liability of the corporation's debts. Corporate formalities include:

• issuing stock certificates
  
• holding annual meetings
  
• recording the minutes of the meetings
  
• electing directors or ratifying the status of existing directors
  

Corporations should always be assisted by a qualified attorney.

Sub Chapter S Corporation (Inc. or Ltd.)

This structure is identical to the C Corporation in many ways, but offers avoidance of double taxation. If a corporation qualifies for S status with the IRS, it is taxed like a partnership; the corporation is not taxed, but the income flows through to shareholders who report the income on their individual returns.

Special Structures

The following business structures are available in some states, but not all. Use the regional information to find options in your area.

Limited Liability Partnership (LLP)

LLPs are organized to protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control. LLPs are not recognized by every state and those that do sometimes limit LLPs to organizations that provide a professional service, such as medicine or law, for which each partner is licensed. Partners report their share of profits and losses on their personal tax returns. Check with your Secretary of State's office to see if your state recognizes LLPs and if so, which occupations qualify.

Professional Service Corporation (PS)

A PS must be organized for the sole purpose of providing a professional service for which each shareholder is licensed. The advantage here is limited personal liability for shareholders. This option is available to certain professionals, such as doctors, lawyers, and accountants. Check with your Secretary of State's office to find out which occupations qualify.

Limited Partnership (LP)

LPs have complex formation requirements, and require at least one general partner who is fully responsible for partnership obligations and normal business operations. The LP also requires at least one limited partner, often an investor, who is not involved in everyday operations and is shielded from liability for partnership obligations beyond the amount of their investment. LPs do not pay tax, but must file a return for informational purposes; partners report their share of profits and losses on their personal returns.

Non-Profit Corporations

These are formed for civic, educational, charitable, and religious purposes and enjoy tax-exempt status and limited personal liability. Non-profit corporations are managed by a board of directors or trustees. Assets must be transferred to another non-profit group if the corporation is dissolved.

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