Small Business v. Startup
Whether your idea is for a small business or a startup depends on your goal. Small businesses tend to have long-term goals within an existing market. If you wish to form a business similar to one that already exists, and you hope to grow and maintain it over a long period of time, then this is a traditional small business.
A startup is meant to disrupt an existing market, become profitable quickly, scale quickly, and in many cases, be bought by a larger existing company. If you think you have the next big idea in tech or another industry, talk with our small business startup lawyers about how to navigate this journey.
Whether your idea is for a startup or a more traditional small business, you will benefit from an attorney’s advice regarding legal entities and formation. Often forming the right type of entity is critical to growth and profit.
We will discuss with you the type of service or product you plan to offer for sale and the liability protection you may need. All of these are factors in determining which entity will be right for you and your family.
Legal entities available in Arkansas include:
You may be able to offer a service or product for sale without forming a legal entity and filing any paperwork with the state. This is known as a sole proprietorship. All of your business revenue and debts are considered your personal income and debts. You are legally liable for anything that goes wrong with the business.
Corporations are the most formal legal entity. Owners are known as shareholders or stockholders. Corporations have a Board of Directors, which do not make day-to-day decisions but make major decisions and steer the direction of the company. Corporations have strict compliance requirements you must adhere to annually. Corporations must draft and abide by bylaws, which establish the business’s internal operating procedures.
The C Corp is the standard or default corporation. The corporation’s profits are taxed as a separate legal entity. When profits are paid to shareholders as dividends, they are then taxed again as the shareholders’ income. This is referred to as double taxation.
Double taxation may be avoided by forming a different type of entity or filing an S election with the IRS. S-Corps do not pay income taxes as a business. Instead, the income flows to the shareholders who are taxed as partners. Talk with our local small business attorneys to help draft and file formation documents for your S-Corp.
You can form a general partnership with another person. This is similar to a sole proprietorship in that the business’s revenue becomes the partners’ incomes, and the partners are liable for the business’s debts. There is no protection against liability.
In a limited partnership. there is a difference between general and limited partners. General partners are liable for the business’s debts while limited partners are only liable up to the amount they invested. General partners also have control of the day-to-day operations.
Limited liability partnerships (LLPs) provide the partners with some protection from liability. Limited Liability Limited Partnerships (LLLPs) protect the general partners from liability. This type of entity is usually formed by professions with a great deal of risk, such as doctor’s offices.
Partnerships are pass-through entities. Any money earned is divided between the partners and taxed as their personal income.
Limited Liability Companies
LLCs combine the advantages of partnerships with some of the protections of corporations. Members of LLCs are protected from liability when there is a legal claim against the company. This type of entity is often considered more flexible than a corporation because you have more options on how to structure the business. Single-member LLCs can be pass-through entities, meaning the income goes to the members and is taxed as their income.
A group of individuals or legal entities can form a cooperative to pursue a specific, mutually beneficial purpose. Arkansas law allows for cooperative corporations for the purpose of agriculture, dairy, mercantile, banking, mining, manufacturing, or mechanical businesses. Members of a coop are generally protected from liability in regard to the business’s debts. Like a corporation, a coop distributes profits through a dividend.