If you have started a new business in Montana, you know what it feels like to put your heart and soul into it. When things are good for your business, they feel good for you. When things are bad for your business, you take it very personally.
This emotional attachment can be valuable in many ways, but it’s a good idea to make sure you don’t take it too far. Sometimes, perhaps inevitably, things beyond your control will harm your business. When that happens, you will need to protect your personal finances.
One of the best ways to do that is by choosing the right legal format for your business.
Sole proprietorships and partnerships
The most common types of businesses are sole proprietorships and general partnerships. Generally, any business owned and operated by one person is assumed to be a sole proprietorship unless the owner has set up a different legal format. Likewise, any business owned and operated by more than one person is considered a partnership unless the owners have chosen a different legal format.
Sole proprietorships and partnerships have a great deal of flexibility and they can be effective ways to run a business. However, they give very little protection to the owners or their personal finances. Taxes for the business come through the owner’s personal taxes. In addition, unless the owners take special steps, they could become personally liable for costs and penalties incurred by the business. Indeed, unless otherwise protected, one of the partners in a general partnership may be held liable for negligence committed by other partners.
If you feel your business is not ready to make the leap to becoming a corporation, you may consider some other business formats:
- Limited partnership: Similar to a general partnership, but with somewhat more regulation, a limited partnership provides a small degree of protection for the individual partners. Investors in the business who have no control over the management of the business can be held liable only for the amount they invested in the business. To set up this type of business, you must contact the Montana Secretary of State’s Office to file a Certificate of Domestic Limited Partnership.
- Limited liability partnership: Also known as an LLP, this format is much like a general partnership, but provides more protection for the individuals involved. In an LLP, a partner generally can’t be held liable for negligent acts of another partner, and they can’t be held personally liable for claims against the business. Taxes come out of the personal income of each partner. To set up this type of format, you must apply for it through the Montana Secretary of State’s Office.
- Limited liability company: Also known as an LLC, this type of business is similar to a corporation in that it offers the owners strong personal protection from liability for the company, but it also gives the management a good deal of flexibility in how they want to run the business. If you choose this format, you will have to file Articles of Organization with the Montana Secretary of State’s Office.
There are a lot of things to consider when forming a new business. Experienced attorneys help business owners to assess their options and choose the strategies that will protect themselves and set up their businesses for success.