Different Forms of Business Structures
The legal form under which a business operates can greatly impact the owner's tax obligation, liability for business debts, control in business decision making, and financing alternatives. The basic legal forms that are used for operating a business are: sole proprietorship, partnerships, limited liability companies and corporations. Other forms of business organization include limited liability companies and joint ventures. Each form has its own advantages and disadvantages depending upon the nature of the business and the prospective owner's plan of operations.

It is important that you consider each form of business organization carefully to evaluate the most appropriate structure for your business. While it is possible for a business to start out under one organizational form and change to another later, proper planning can prevent difficulties caused by an unsuitable legal structure. We recommend that you seek counsel from an accountant and an attorney early on to determine the form of business organization that best suits your business.

Sole Proprietorship
The sole proprietorship is a business that is owned by a single individual. It is the easiest legal structure to adopt and is the most common form of business organization.

Partnership
A partnership is the combining of one or more individuals or businesses as co-owners under a partnership agreement. Each co-owner, or partner, contributes money, labor, property, or skills to the partnership, and shares in the profits and losses of the business. You will need a written and signed partnership agreement. The agreement determines the powers, liabilities, and authorities of each of the partners and it should be in writing. A partnership may have general and limited partners.

General partners actively participate in the management of the business and have unlimited liability. The income of the general partnership is directly taxable to each individual partner based on his or her proportionate interest in the company.

Limited partners, or investors, cannot actively participate in the management of the business and have limited liability. Limited partnerships must have at least one general partner who is responsible for all debts, liabilities, and obligations of the firm. Generally, the liability of the other partners is limited to the amount of the investment by each partner. Both general and limited partners share in the profits and losses of the business.

Corporation
A corporation is a separate legal entity that has duties, powers and responsibilities in and of itself. This usually means that when individuals act on behalf of a corporation, these actions are attributable to the corporation but not the individual, thus limiting the liability of the owners. Incorporation, however, will not exempt you from personal responsibility for business loans. Your banker, and possibly your suppliers and landlord will require you to guarantee repayment personally and will ask for you to pledge your personal assets as collateral. The profits of a regular corporation are taxed twice if distributed in the form of dividends, at the corporate as well as the individual level.

There are two types of corporations: regular or "C" corporations and Subchapter S corporations. A regular corporation must file a tax return each year to pay tax on the corporation's income. Any profits left after taxes are paid may be given to stockholders, who must then pay tax on the amounts they receive. The S corporation has the legal benefits of a regular corporation and the tax benefits of a partnership. Like a corporation, it enjoys limited liability. But like a partnership, it is not subject to corporate federal income tax. Although it files a tax return, the income and expenses of the S corporation are divided among its stockholders, who report the profits on their individual returns. Thus, it is taxed only once. Because the S corporation avoids double taxation while providing stockholders the protection of a regular corporation, this form of organization is popular among small businesses. However, Subchapter S status may create disadvantages that should be considered, please seek advice from an attorney if you are considering this option.

Limited Liability Company
A Limited Liability Company (LLC) is a relatively new form of business organization that incorporates components of both a partnership and a corporation. The Internal Revenue Service has issued “Check the Box” regulations which permits an LLC to choose how it wishes to be taxed. The LLC can elect to be taxed as a corporation, to be disregarded as an entity or to be treated as a partnership in some cases. Special rules apply to LLC’s who do not make an election. Please see Division of Revenue Regulation 98-1 and Addendum for State treatment of LLC’s.

Limited Liability Partnerships
Current limited liability partnership (LLP) laws provide for an entity similar to an LLC, with limited liability, that can be formed simply by registering an existing partnership.

Joint Venture
A joint venture is a partnership of one or more sole proprietorships, partnerships, or corporations for the purpose of pursuing a specific business activity or transaction. The main advantage of a joint venture is that existing businesses can join together without having to form a new entity and without having any continuing obligations to each other beyond the joint venture agreement. The primary disadvantage is that parties of the joint venture are liable for the actions of each partner.

How to Set Up the Business Entity (Flow Chart)
While this is not the most fascinating topic, this section can save you time and trouble. This list includes everything that you need to do to properly start up a business in Delaware. If you will follow each of these steps, you will be registered with all of the proper tax authorities, and you will receive all of the proper forms at the proper time. If you follow these steps in sequence, you will always have the

information you need for the next steps. These are the regulations that exist as we go to press. Please consult your tax and legal advisor before proceeding.

Step 1 - Determine Business Entity Type
Choose the type of organization that is best for your needs: sole proprietorship, conventional corporation, sub-chapter S corporation, Limited Liability Company or partnership. For assistance with tax or accounting questions, contact your accountant. For legal questions, see your attorney. For information on incorporating in Delaware, call the Secretary of State Division of Corporations Office at (302) 739-3073 or go to www.state.de.us/corp/index.htm

Step 2 - Determine legal status
Except for operating as a sole proprietorship, you must form your business entity under the laws of some state. For information concerning forming your business entity in Delaware, call the Secretary of State, Division of Corporations Office at (302) 739-3073 or go to www.irs.gov.

Step 3 - Register with the IRS
To get an IRS Employer Identification Number (EIN), call or visit your local IRS office, or call 1-800-TAX-FORMS (1-800-829-3676) or go to www.state.de.us/revenue. Ask for form SS-4. (This is not a requirement for sole proprietors with zero employees; they can use their social security numbers.) It will take them approximately six weeks to reply after you mail the application. To save time, you can get your EIN by telephone. After you have received the SS-4 and completed it, call the IRS on weekdays from 7:30 a.m. - 2:30 p.m. They will ask you for the information on your SS-4, and then they will ask you to write the new number on the form, sign it, and mail it back to the IRS. Be sure to make a copy before mailing.

After you have received your federal EIN, call the Delaware Division of Revenue or go to www.state.de.us/revenue to obtain a business license. Ask them to send you a "CRA," Combined Registration Application.

Step 4 - Determine if you will have employees
If you operate your business as a sole proprietorship or as a partner in a partnership, you are not considered an “employee.” You are personally responsible for paying estimated taxes to the IRS and the Division of Revenue. If you decide to have employees you will need to register with the Division of Revenue and the Department of Labor.

By law, any non-incorporated business entity (sole proprietorship, or partnership) must also register with the Prothonotary at the local county office of the Superior Court. You must register separately in each county where you will do business. For more information go to the web site http://courts.state.de.us/superior/formspublic.htm. You will need to do a name search to be sure your chosen name has not already been used. Take a $15 check and identification, the form has to be notarized. Doing this will protect your trade name from use by others in each county where registered. In case of a lawsuit, a business not registered could be fined $500. Also, they could lose use of the name to whoever properly registered it. Some banks require registration of names by business customers.

New Castle 577-6470
Kent 739-3184
Sussex 856-5740

Step 5 - Register with Division of Revenue and the Department of Labor
In addition to registering with the Division of Revenue as a withholding agent, you will need to obtain a business license to conduct and active trade or business. To register and apply for a business license, request Form CRA, Combined Registration Application or go to www.state.de.us/revenue.

If the business is located in a town or city, call the local government to determine local business requirements.

If the business will have employees, call the State Unemployment Insurance Office and get an UC-1 form required for unemployment insurance. The telephone number is (302) 761-8446 or go to www.delaworks.com/divisions.htm. If you are a corporation (C or S), also ask for a copy of UIS-39, "Coverage of Corporate Officers."

Obtain Workman's Compensation Insurance for your employees through an independent insurance agency. Prepare an employee policy manual to save you trouble down the road.

Step 6 - Satisfy Local Zoning and License Requirements
Before commencing a new business you should contact the local zoning or planning office to determine if your activity is permitted at the location you have chosen. Many cities and towns also require a business license to operate in the respective jurisdiction. The City of Wilmington imposes a net profit tax on businesses located within the city. It is suggested that you contact the local government office in which you intend to conduct business.

Step 7 - Contact other State Agencies
The Division of Revenue business license is not a regulatory license nor does it attest to the workmanship of the licensee to perform the listed activity or the quality of goods sold. The Division of Professional Regulation issues regulatory licenses, which require certification of the applicant. Additionally, other Delaware agencies require licensing and certification of selected business activities.

Step 8 - Other Registration Considerations
You should register your trademark(s) with the U. S. Patent & Trademark Office(PTO) if your business, especially a consumer business, uses a name or symbol worth protecting and it may someday sell beyond the local area. You still have common law rights to a name even if it is not a federally registered trademark. To be eligible, your business must be engaged in interstate commerce of some kind. You qualify if any good or service you sell crosses state lines, or if any customers come from out of state. The PTO number is (800)-786-9199. Their web site is a great source of information: www.uspto.gov.