A: There are a couple of legal issues posed by your question, which is a deceptively complex. In order to be absolutely sure that you are starting your business on the right foundation -- and you owe it to yourself and your family to do no less -- get personal advice from your tax adviser, who will typically be a lawyer or accountant who specializes in small-business matters.
However, Marco D. Costales, a lawyer with the law firm of Nossaman, Guthner, Knox & Elliott in Los Angeles, recommends that you investigate establishing a limited liability company, commonly called an "LLC."
TAXES AND LAWSUITS. "As a legal matter, lenders should not be charging corporate borrowers higher interest than borrowers using another form of legal entity, such as a partnership or limited liability company," Costales says. "But as a practical matter, if you find that this is occurring, you should consider setting up a limited liability company, which enjoys the liability protection of a corporation and the 'flow-through' tax treatment of a partnership. These entities tend to offer the best of both worlds."
The amount of money that one starts with does not impact the analysis of which type of legal entity to use, Costales says. But there are serious tax and liability implications that hinge on setting up the proper legal structure for your business. Once you have done that, it's neither easy nor cheap to make a change if you find you've blundered early on.
Also, "keep in mind that no matter what type of entity you choose, it must be adequately capitalized so that the owners may enjoy liability protection," Costales warns. Good luck.
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