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Q: Business Type for New Company ( Answered 5 out of 5 stars,   1 Comment )
Subject: Business Type for New Company
Category: Business and Money > Small Businesses
Asked by: brightmind-ga
List Price: $20.00
Posted: 08 Jun 2005 12:03 PDT
Expires: 08 Jul 2005 12:03 PDT
Question ID: 530991
I am a licensed psychologist (LEP) and I want to create an educational
center with up to 5 to 10 people - Not all who have same license
(if at all).

What is the soundest business type that I can create that allows
limited liability, flexible payroll/healthcare options and will allow
me to to receive both public and private funding from multiple

Clarification of Question by brightmind-ga on 08 Jun 2005 12:33 PDT
I'm located in San Francisco California
Subject: Re: Business Type for New Company
Answered By: taxmama-ga on 08 Jun 2005 20:41 PDT
Rated:5 out of 5 stars
Dear BrightMind,

Since you're in California, two of your options are totally eliminated.
You cannot form an LLC or an LLP.


In California, as a licensed psychologist, you would be required to 
form an LLP (limited liability partnership) to associate yourself with
other professionals. However, since the others aren't also licensed,
they may not own shares of your LLP. But I doubt that you can form an
LLC, since your license requires you to form an LLP. Do you see the 

Pity - the LLC would be your best option if it were permitted.
You might want to check with a tax attorney to see if that would
work in a mixed-license group of owners. Why? Because an LLC lets
you have different types of owners, with different profit or 
loss sharing. The owners, or members, can be on payroll and
receive benefits. And of course, you have liability protection -
of a sort. 

Remember - anytime you have a business providing personal
services, if you provided the services, someone can sue you
personally, even if you're incorporated. 

So, what are your options?

1) A limited liability partnership - it requires someone or 
something to be a general partner and accept liability, but 
this provides the most versatility and flexibility for what
you have in mind. You could form a corporation or S-corp that
you own alone, to be the general partner. 

2) An S-corporation. You may have up to 125 shareholders. 
They may own varying shares. Each owner could be on a 
payroll based on their hours or services. But they would get
a proportionate share of the profits, based on their investment
or contribution.  There are a number of drawbacks to the S-corp, 
because employees who own 5% or more of the company may not get
a variety of deductible benefits available to regular employees. 

3) So...that leaves your basic corporation. This type of business
format lets you have a variety of classes of stock - even stock 
that's non-voting. (S-Corps only have one class of stock.) So, it
lets you provide an assortment of dividend plans, depending on the
type or classification of stock. Owner-employees are entitled to
the same kind of benefits as other employees, including medical, 
insurance, pension, child care, etc. 

The trick is to make sure that you drain the company of profits
each year so you avoid double taxation, or the higher personal 
service corporation tax rates. 

This is just a brief overview of the situation. You really want 
to sit down with a good tax professional and an attorney, with 
all your partners and work out what's best for all of you 
together. It won't make any sense until you're all in the same
room and can express what each of you need in terms of compensation
and benefits  - and what each of you can contribute to the total
annual income to make the wages and benefits possible. 

Here are some books you might want to look at before you
make the decision - Fred Daily's Tax Savvy for Small Businesses

And Jan Zobel's Minding Her Own Business: The Self-Employed Woman?s 
Essential Guide to Taxes and Financial Records

Profits, Taxes, & LLCs by Holmes F. Crouch

I hope this helps a little?

This is a big area. There is no 'one perfect business form'.
It will depend on all your partners' needs and goals - 
and especially what they can contribute. 

Oh, and be sure to include a way out for each of you, so if
you want to leave, or buy them out, you can.

Best wishes,

Your TaxMama-ga
brightmind-ga rated this answer:5 out of 5 stars and gave an additional tip of: $10.00

Subject: Re: Business Type for New Company
From: pinkfreud-ga on 08 Jun 2005 12:28 PDT
It might help if we knew where you're located. Google Answers is a
worldwide service; business law & practices vary from place to place.

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