When starting your wine business or any other business, one of the first things to consider is the particular legal structure in which you will operate. Every business needs a legal entity to limit personal liability and pay appropriate taxes. While it is possible to change the legal structure of your business in the future, it is best to select the entity most suited to you particular needs and uses at the start.
A sole proprietorship is the default entity for people who start a business on their own. It’s created in a blink of an eye and can be dissolved that quickly as well. In addition, there are no legal set up fees, ongoing entity fees, or special taxation issues – and no legally required day-to-day reporting requirements.
As you might imagine, these sole proprietorship benefits are a huge draw to new entrepreneurs. However – and it’s a very big “however” – a sole proprietorship has ZERO asset protection. This means that all of your personal assets are on the line for debts of the business and all of your business assets are on the line for personal debts. There is no separation between business and personal assets.
A general partnership is the default entity for two or more people who start a business together. Like the sole proprietorship, it can be created in a moment – at the conference table – or at a back yard barbecue with a cold brew in hand.
There are no required legal fees*, ongoing entity fees, or special taxation issues – and no legally required day-to-day reporting requirements. General partnerships have the same “however” as sole proprietorships – absolutely no asset protection. If you or a partner gets sued, you can lose everything you own.
*Legally, you don’t need a lawyer to set up a general partnership; however, in practicality, you do – you need a formal partnership agreement to open a bank account or apply for a loan.
On the other hand, a limited partnership does – as the name implies – limit liability. Each partner’s liability is limited to the amount he or she has invested in the business itself – personal assets can’t be taken in a business related lawsuit.
There must be a formal written partnership agreement. Otherwise day-to-day operations are simple – and taxes are filed on the partners’ individual income taxes.
Limited Liability Company
The limited liability company or LLC tends to be the “go to” entity for a majority of small businesses. It combines the best of both the partnership and corporation, while eliminating the worst of both of these entities.
Most importantly, the LLC offers asset protection. This means that your personal assets can’t be taken in a business-related lawsuit (if your LLC has more than one member). If you are creating the business on your own, ask your business attorney whether the LLC is a good entity for a single member – the law appears to be flux.
The LLC does require an informational tax return – although profits and losses are shown on the members’ individual tax returns. There are no day-to-day reporting requirements.
While LLCs are the popular “go to” entity for small businesses, larger businesses or business with several investors may benefit from the S or C corporations. Corporations have a long history of asset protection – though formal set up, operating procedures, record keeping, and tax reporting are required.
Ask your business attorney about C corporation double taxation and the benefits of an S-corp election.
Where to Get Help with Business Law Issues
A qualified business lawyer will help you choose, set up, run, and wind down the business entity that best fits your individual situation. Along with entity issues, every business needs to be aware of licensing, insurance, labor law, immigration law, tax law, and intellectual property law considerations.