Best structure?

[LucyP]

I will start out by telling you that I have an MBA, so you know I know absolutely nothing about starting a business :p

I am a Kansas resident and preparing to open a small bakery/cupcakery business. My husand and I will be the sole owners, but I am not sure which would be the best option for our business structure - C Corp or S Corp? We are financially conservative and want to protect our home and assets so I am not even considering the sole proprietor option.

I have bought several "Dummy" books on starting a small business, which list out differences, but I am curious as to how most small businesses would approach this.

[Spider]

Welcome to the forum. Why do you want to start a bakery?

[vangogh]

Welcome to the forum Lucy. Don't worry, none of us knew much about starting a business at one point.

Have you considered an LLC? The liability is limited, but it would be easier to set up. I don't know too much about corporations. We have a couple of experts here, though so hopefully one of them will find this thread soon. One of them (David) has a lot of information on LLCs on one of his sites.

Limited Liability Company Center (http://www.limitedliabilitycompanycenter.com/)

Might be worth taking a look.

[LucyP]

Why a bakery? I make fantastic cupcakes and have been filling orders for friends and friends of friends. I have been trying to keep a low profile with this as I don't use a commericial licensed kitchen and am basically "bootlegging" right now. They all keep asking when I might open a shop so that I can expand, so I am strongly considering the possibility.

As for LLC. I didn't want to go down that path after reading the info on the Kansas Sec of State site the following disadvantages -
1. Articles of Organization must state a date upon which the company will dissolve
2. LLCs are complicated to form legally and require substantial accounting work
3. Limited transfer of interest—an investment is illiquid since all members must vote to transfer a member’s interest

Number 1 being my greatest concern. I don't want to have to keep reorganizing my company. So I thought that the Corp was the best route to take. I think my next step will be to talk to an accountant/business advisor and/or corp attorney to get the correct structure.

[Business Attorney]

Why a bakery? I make fantastic cupcakes and have been filling orders for friends and friends of friends. I have been trying to keep a low profile with this as I don't use a commericial licensed kitchen and am basically "bootlegging" right now. They all keep asking when I might open a shop so that I can expand, so I am strongly considering the possibility.

As for LLC. I didn't want to go down that path after reading the info on the Kansas Sec of State site the following disadvantages -
1. Articles of Organization must state a date upon which the company will dissolve
2. LLCs are complicated to form legally and require substantial accounting work
3. Limited transfer of interest—an investment is illiquid since all members must vote to transfer a member’s interest

Number 1 being my greatest concern. I don't want to have to keep reorganizing my company. So I thought that the Corp was the best route to take. I think my next step will be to talk to an accountant/business advisor and/or corp attorney to get the correct structure.

Lucy, I don't know where you read that Articles of Organization must state a date on which the LLC will dissolve. In fact, unlike some other states, there is nowhere on the Kansas LLC Articles of Organization (http://www.limitedliabilitycompanycenter.com/kansas.html) form to even indicate that that the existence is other than perpetual.

In fact, Kansas law provides that a limited liability company is dissolved and its affairs shall be wound up "at the time specified in an operating agreement, but if no such time is set forth in the operating agreement, then the limited liability company shall have a perpetual existence." K.S.A. 17-76,116.

With respect to the two other points:

I don't think that LLCs are more complicated to set up than any other entity, though there are differences of course. The accounting may be more difficult for many accountants if you have more than one member, since partnership accounting (including maintaining capital accounts and other tax rules unique to partnerships) is less familiar to many accountants. If you are the only member, the accounting is typically no different than for a sole proprietorship (unless you make elections to treat the LLC as a corporation or an S corp).

Normally, any small business wants limited transferability of interests. Even if you had a corporation, which by its nature has freely transferable interests, I am sure your attorney would recommend a shareholder agreement to impose limited transferability on the shares.

[nealrm]

Lucy,
You might wish to review the cost of incorporating versis the actual protection it will offer. It will offer you protection from some debts of the business. However, banks will require you to personally guarantee a business loan. That will mean that your personnel assets will be on the line. Your suppliers may also ask that you personally guarantee a line of credit. So if those are the major liabilities that you wish to advoid, a corporation may not be to your financial advantage.

[Business Attorney]

Lucy,
You might wish to review the cost of incorporating versis the actual protection it will offer. It will offer you protection from some debts of the business. However, banks will require you to personally guarantee the a business loan. That will mean that your personnel assets will be on the line. Your suppliers may also ask that you personally guarantee a line of credit. So if those are the major liabilities that you wish to advoid, a corporation may no be to your financial advantage.

That is probably true if those are the only liabilities. I agree that in a single-owner/single-employee business, the limitations on liability are not as much protection as people may think (http://www.limitedliabilitycompanycenter.com/how_limited_is_limited_liability.html). However, if I were selling food products, there is no way I would operate as a sole proprietor or general partnership just to save the $165 filing fee and the $50 per year annual report fee that an LLC has to pay.

[nealrm]

Good link. It does a good job of pointing out that limited liability is not as limited as many think.

Those are not the only costs associated with incorporating. That annual report must be certified by a CPA. Plus, there is the cost of getting a lawyer to setup the corporation. In addition, the day-to-day activities in a corportion are more complex. Accounting, payroll, taxes, withdrawning proffits, etc get more complicated and may require professional help. If it is just you and your husband (no employees) a LLC maybe overkill. If/when you hire employee then I would agree with David.

All I am saying is look at all the costs and work required before you make a decision. Then make the one that is best for you.

[Evan]

If you and your husband operate a business together, you are taxed as a partnership anyways. Becoming an LLC doesn't change the taxation complexity at all... I agree with David, that most small businesses want limited transferability of ownership because of the small size. How would you feel if your husband sold his portion of the business to your next door neighbor, and he does absolutely nothing for the business? He could if you allowed for the transferability of ownership. The fact is, in many instances for small business, you do not want transferability of ownership when there are only a handful of people operating the business.

I also am thinking that a bakery requires a lot of initial capital with equipment. An LLC would be advantageous as you may experience a few years of losses, and you'll probably have no issue deducting them in an LLC. With an S-Corp, you'd want the loan to be in your name individually and not the business if you plan on deducting large losses as a result of these capital expenses. A C-Corp would be even worse if you had loans.

Of course what you decide to do is up to you... For me, I'd run it as an LLC.

[huggytree]

LLC and file as an S-Corp

from what i remember C-corps are more for large companies....all the advantages for a small company are w/ the S-corp

LLC is less to start and you can file as an S-corp......why go S-corp when you can LLC for less?>

[Evan]

I would disagree with taxation as an S-Corp if you anticipate having large losses in the beginning. You start following the rules of S-Corps when it comes to basis, and not the partnership rules which are more favorable.

And in all states, an LLC isn't less expensive than a corporation to maintain. Further, the added administrative expenses of payroll (if you are otherwise the only employee) often do not outweigh the benefit of having an LLC.