How I Will Be Rich

Joe and I are starting a business and I am trying to figure out all the steps that must be taken. We have several ideas for internet businesses and we need any income that is made to go in to a bank account that is separate from mine or Joe’s. Currently, any income that we make off current ventures goes in to my bank account and I divvy out Joe’s share. This would not be a problem other than the fact that I have to pay taxes on any income we make at the end of the year. The best method to solve this dilemma is to have a separate business entity with a unique tax ID number and a bank account.

The first step is to figure out a business entity type. There are several types of business entities.

• Sole Proprietorship – This is for one person who is starting a business by themselves. The Sole Proprietor is pretty much completely liable for any of the companies debts. Sole Proprietors also may not take advantage of the various tax advantages that typically come along with owning a business because there is very little separation between the person and the business entity. This does not apply to us because Joe and I are starting this business together.
• General Partnership – This is basically the same thing as a sole proprietor but with two or more people. Liability is split between the two owners and profits are taxed as personal income. This is probably how Joe and I will start with our business because it is easy to start and we are not worried about liability issues.
• Limited Partnership - Like a general partnership but one partner is the controlling partner and and is liable for debts but also has more control over operations. The other partner’s liability is limited but they typically have less control over business operations. This is usually the entity used when one person is going to run the day to day operations while another person is more of a silent investor that wants to be away from the business operations.
• Corporation – This is a legal entity separate from the owners. Any amount of people can own a corporation, they are called shareholders. This is the most expensive type of business to start and maintain. There are annual filing fees and a board of directors must be established and meet annually. The owners are not personally liable and the company is taxed as it’s own entity. This seems a little over the heads of Joe and I. We are just a couple of guys trying to get a couple websites set up.
• Limited Liability Company - A Limited Liability Company or L.L.C. is sort of a cross between a Corporation and a partnership. You receive the tax benefits and and the lack of liability that the corporations receive but also the management benefits of a partnership. Ths may be another way to go for Joe and I.

I am still undecided about whether or not a general partnership or a LLC is the best route to go for Joe and I. I will probably consult an accountant to discuss the best route for us. Once we do decide, we will either fill out a Statement of Partnership Authority (GP-1) for a General Partnership or Articles of Organization (LLC-1) for a Limited Liability Company. Once I have filled the appropriate form out, I will mail it to the secretary of state. In California, it will cost $70 to file either one of these forms.

In my next article I will discuss the steps that I will take next. I still need to file tax identification documents and open a bank account. You can view Part 2 Here.

-M

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