QUESTION
What would be the suggested business entity for a small group of individuals starting up a new online only business?
Asked on Sep 20th, 2012 on Business Law - New York
More details to this question:
We are trying to minimize our initial cost where possible since we are online only. We would like to sell primarily hobby items. We understand the lowest cost most likely would come from a general partnership, but we have considered benefits that would come from being a LLC or a S-Corp. We do not know if a partnership can form into one of the latter entities down the road should we decide we do not want to be just a partnership any longer, or we expand our product line into areas which may require protection via limited liability that is offered by the other two. We also do not know the minimum capital investment required for the latter two (LLC and S-Corp which is why we are temporarily favoring a General Partnership for its low cost as well).
1 ANSWER
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It is entirely possible to incorporate (or contribute to an LLC) a partnership, and these changes in form occur all the time. The downside of a general partnership is that every partner has unlimited personal liability for the debts of the partnership, including liability for the misconduct of every other partner. None of the alternative entities you are considering has any minimum capital contribution, although in order to be considered to have economic substance it must have some capital. I realize that you want to do this cheaply, but the benefits of limited liability are meaningful and can only be achieved when the entity you form is truly separate from you personally.
Answered on Sep 21st, 2012 at 8:09 AM