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Welcome to this video on the Types of Business Organization in Alaska, presented by StartingYourBusiness.com. This video is a part of our series of videos on starting a business in Alaska. Choosing the way your business is legally organized and structured is a fundamental step of starting a business and one to start thinking about early because it impacts the process of naming the business, applying for licenses and permits, and how the business is taxed. The business organization is the legal framework of an entity that is engaged in commercial activity. There are four primary types of business organization that a small business owner will choose from which include the sole proprietorship, partnership, corporation or LLC. Each entity has its own set of pros and cons and each has some considerations that may make one better than another for you and your business. The considerations include the cost of forming the entity, liability protection, ability to get investment, tax burden, administrative requirements and the complexity of formation. It can be a little overwhelming and confusing to pick the perfect entity for your business, but keep in mind, that the entity you choose today does not have to be a forever decision as you can change to a different entity later on. The first entity that we will cover is also the most simple, which is the sole proprietorship. The sole proprietorship is basically an individual who decides to go into business for themselves. There is no separate legal entity as the business is tied to an individual, making the business and the individual the same legally. Since there is no state filing for the sole proprietorship, a major pro for this entity is that it is easy, fast and inexpensive to form. There is no sharing ownership, which means there is no board of directors or shareholders to be responsible to and the taxation is relatively simple as the profits or losses flow to the owner's personal tax return. While there are several upsides to the sole proprietorship there are several downsides and the biggest is unlimited liability and here's why. Since the business and the owner are considered the same legally, should the business get sued, the owner's personal assets are potentially at risk. The risk of being a sole proprietorship really goes up if the owner has significant personal assets or has employees who could cause the business to get sued. There is also limited access to capital. This just means that unlike the partnership, corporation or LLC, there aren't other people that you can have invest in the business. Last, the sole proprietorship has a limited life, so if the owner passes away or decides to get out of business, that business essentially ceases to exist. This isn't a major concern for many businesses, but if there are contracts or licenses that the business relies on, the sole proprietorship may not be the best choice. Forming a sole proprietorship is pretty simple. Since there is no official state filing, you can decide to go into business right away as a sole proprietorship and be in business. We will cover other details for starting a sole proprietorship in later videos and at StartingYourBusiness.com that may have to be done like registering a business name and applying for licenses and tax numbers. The next entity is the partnership, which is a business owned by two or more individuals. The partnership is very similar to the sole proprietorship in that there is no legal entity and the owners have unlimited liability. The good things about the partnership are that it is easy, fast and inexpensive to set up with no filing or fees to set up with the state. There are also more people involved which means there is more talent and funds to put into the business. Like the sole proprietorship there are significant downsides with the primary one being unlimited liability, but this time, if one partner makes a bad business decision, every other partner's personal assets are at risk, making the partnership riskier than the sole proprietorship. Another partnership con includes sharing of control. Since partnerships are usually informal and very little is in writing, disagreements can occur that can be devastating to the business. A partnership can also be difficult to get out of, should the remaining partner not be willing to buy out the departing partner. Just like the sole proprietorship there is no official filing for a partnership with the state. We will cover some of the other possible requirements that a new partnership may need to do in later videos and at StartingYourBusiness.com. The corporation is the third of the four business entities and is completely different from the sole proprietorship or partnership because now we have a legal entity that is separate from the owners. While the corporation sounds like it is something for a large business, it is really just a filing with the Alaska Department of Commerce. Corporations can be owned by a single owner or multiple owners. The corporation has several pros, especially now that it is a distinct legal entity and the owner's personal assets are separate from the businesses assets. While the corporation has this liability protection to protect the owners should the business get sued, some people confuse liability protection for bankruptcy protection. While it potentially could protect an owner from a vendor trying to get at assets in the event of bankruptcy, if the business were to try and get a loan, the bank will typically require any person owning 20 percent or more of the corporation to provide a personal guarantee that the individual will pay the loan back. Another pro is that the corporation has unlimited life which could be useful in situations where there are key contracts or licenses held by the business as the business can essentially live forever, provided the owners transfer stock and keep paying the state corporation fee. The corporation can also sell shares of the business and raise money to potential investors instead of relying only on debt like a sole proprietorship or partnership. There are a few downsides of the corporation which include the cost of formation and increased administration. The corporation costs $250 to file with the Alaska Department of Commerce. In addition, there are a number of administrative duties such as an initial board of directors meeting, shareholders meeting, taking minutes at the meeting, issuing stock certificates and writing the bylaws. There are three ways to form a corporation in Alaska. One, you can do it yourself. On the Alaska Department of Commerce's website, you will fill out and file the Articles of Incorporation. Since there are a number of administrative duties that need to be done right, if you plan to do it yourself, be sure to do your research before filing. Second you can hire online companies that specialize with forming business entities. Startingyourbusiness.com has a list of companies that provide this service. What's nice with these services is that in addition to making sure all of the legalities of forming the corporation are covered they also send alerts whenever reports are due, so you have one less thing to try and remember. The one-time fees for these services usually start around $50-$150 plus the state fees. Last you can hire an attorney. This is going to be the most personalized service, but also the costliest. You will want to go this route if your assets are substantial or want to work one-on-one with someone to form the corporation. Expect to spend a minimum of $500-$1,000 for a simple corporation. The last entity that we will talk about is the Limited Liability Company or LLC. Just like the corporation, the LLC is a legal entity that is separate from its owners and is a filing with the Alaska Department of Commerce. LLCs can be owned by a single owner or multiple owners. The LLC also costs the same as the corporation in Alaska, which is $250. The LLC shares all of the pros of the corporation like being a separate legal entity, unlimited life, and raising investment capital, but with the LLC, you don't have to hold meetings, take minutes, and so on, making the LLC much easier to run than the corporation. There is one potential downside to the LLC which is that every state has its own set of LLC laws so if you have an Alaska LLC physically doing business in another state, the LLC may not be the best entity for your business. The process of forming a LLC in Alaska is similar to forming a corporation. You can do it yourself by filing Articles of Organization or you can get guidance from a professional to make sure it's done right. Check StartingYourBusiness.com a list of formation companies. There is a lot to think about before deciding on the right legal entity that best fits your personal situation and business needs, so be sure to do some research before jumping in. At startingyourbusiness.com, we provide a free printable comparison guide with some of the pros and cons of each entity to help you compare them all. Starting a business is hard, but you don't have to do it on your own. StartingYourBusiness.com has lots of information to help get your business started and we have experienced business advisors ready to answer your questions. There is no cost or catch to use our service either, so visit our site to get started!