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Starting a Business in Missouri or Kansas

How to Choose a Business Structure that Protects You and Your Dreams

employees hard at work
LLC, S-Corp or Sole-Prop? To get your business off on the right foot, you first have to make sure it's legal. Your first step: decide what kind of business entity (legal structure) is best for you. 

So buckle down, this is a long one.

Below, we've spelled out the what, why, pros/cons and next steps of choosing to operate as a sole proprietorship, partnership, corporation and limited liability corporation (LLC).

(Prefer a handy chart: take a look forms of business comparison chart. Thinking about starting a nonprofit? Start here.)

Why you have to choose a legal structure

Your legal configuration defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span and financial structure.  

Your decision will have long-term implications (think legal liability, capital acquisition, business succession, taxes, etc.), so you may want to consult with an accountant and attorney to help you select the form of ownership that is right for you.  

As you make your choice, consider:

  • The level of control you wish to have
  • The level of “structure” you are willing to deal with
  • The business’s vulnerability to lawsuits
  • Tax implications of the different organizational structures
  • Expected profit (or loss) of the business
  • Whether or not you need to re-invest earnings into the business
  • Your need for access to cash out of the business for yourself

Let's take them one by one:

Sole Proprietorship

The vast majority of small businesses start out as sole proprietorships.  These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business.  Sole proprietorships own all the assets of the business and the profits generated by it.  They also assume complete responsibility for any of its liabilities or debts.  In the eyes of the law and the public, you are one in the same with the business.


Advantages of a Sole Proprietorship
  • Easiest and least expensive form of ownership to organize.
  • Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
  • Profits from the business flow-through directly to the owner’s personal tax return.
  • The business is easy to dissolve, if desired.

Disadvantages of a Sole Proprietorship
  • Sole proprietors have unlimited liability and are legally responsible for all debts against the business.  Their business and personal assets are at risk.
  • May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
  • May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
  • Some employee benefits such as owner’s medical insurance premiums are not directly deductible from business income (only partially as an adjustment to income)

Partnerships

In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law does not distinguish between the business and its owners.  

The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed; Yes, its hard to think about a “break-up” when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems.  They also must decide up front how much time and capital each will contribute, etc.


Advantages of a Partnership
  • Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.
  • With more than one owner, the ability to raise funds may be increased.
  • The profits from the business flow directly through to the partners’ personal tax return.
  • Prospective employees may be attracted to the business if given the incentive to become a partner.
  • The business usually will benefit from partners who have complementary skills.

Disadvantages of a Partnership
  • Partners are jointly and individually liable for the actions of the other partners.
  • Profits must be shared with others.
  • Since decisions are shared, disagreements can occur.
  • Some employee benefits are not deductible from business income on tax returns.
  • The partnership may have a limited life; it may end upon the withdrawal or death of a partner.

Types of Partnerships that should be considered:

1. General Partnership

Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement.  Equal shares are assumed unless there is a written agreement that states differently.

2. Limited Partnership and Partnership with limited liability

“Limited” means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decision, which generally encourages investors for short term projects, or for investing in capital assets.  This form of ownership is not often used for operating retail or service businesses.  Forming a limited partnership is more complex and formal than that of a general partnership.

3. Joint Venture

Acts like a general partnership, but is clearly for a limited period of time or a single project.  If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.


Corporations

A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it.  A Corporation can be taxed; it can be sued; it can enter into contractual agreements.  The owners of a corporation are its shareholders.  The shareholders elect a board of directors to oversee the major policies and decisions.  The corporation has a life of its own and does not dissolve when ownership changes.


Advantages of a Corporation
  • Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
  • Generally, shareholders can only be held accountable for their investment in stock of the company.  (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
  • Corporations can raise additional funds through the sale of stock.
  • A Corporation may deduct the cost of benefits it provides to officers and employees.
  • Can elect S Corporation status if certain requirements are met.  This election enables company to be taxed similar to a partnership.

Disadvantages of a Corporation
  • The process of incorporation requires more time and money than other forms of organization.
  • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
  • Incorporating may result in higher overall taxes.  Dividends paid to shareholders are not deductible from business income; thus this income can be taxed twice.


Subchapter S Corporation

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return.  The catch here is that the shareholder, if working for the company, and if there is a profit, must pay his/herself wages, and it must meet standards of “reasonable compensation”.  This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit.  If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.


Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most states.  It is designed to provide limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.  Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed.  The time limit can be continued if desired by a vote of the members at the time of expiration.  LLC’s must not have more than two of the four characteristics that define corporations:  Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.


Federal Tax Forms for LLC

Taxed as a partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above.

Advantages of an LLC
  • Compared to sole proprietorships and partnerships, LLCs have the most advantages. However, not all businesses are at a stage when an LLC makes good business sense.
  • LLCs are similar to corporations in that they offer limited liability protection to its owners.
  • LLCs have fewer corporate formalities (re: less paperwork). With less stringent requirements, LLCs are easier to form and easier to keep in good legal standing than corporations.
  • Compared to corporations, LLCs have greater tax flexibility. The IRS does not consider an LLC to be a distinct entity for tax purposes. That means members can outline how they will be treated for tax purposes in their Operating Agreement.
  • Compared to limited partnerships. LLCs offer liability protection to all the members of the company, unlike a limited partnership, which only provides liability protection to limited partners.

Disadvantages of an LLC
  • Profits may be subject to self-employment taxes, which are often higher than the corporate levels.
  • In many jurisdictions, if a member departs the LLC, the LLC ceases to exist, unlike a corporation that can continue to "live on" despite the comings and goings of shareholders. An Operating Agreement can overcome this disadvantage.


Next Steps for Starting a Business in Missouri

Ready to roll? Here's what you need to do if you're registering as a sole proprietorship in Missouri.

Employee Identification Number (EIN):
Employers with employees, business partnerships, and corporations must obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service. Even if you are a sole proprietor and don’t have employees, it is still good practice to obtain an EIN…you may need it for some government forms, banks often require it for loans and it can be used instead of your personal Social Security Number to protect against identify theft. Apply for an Employer Identification Number (EIN) online.

Register with the Missouri Secretary of State:
Sole proprietors using own name DO NOT need to register. Check on the availability of your business name by searching the Secretary of State’s online database. Sole proprietors using a name other than your own, Register the name of your business with the Secretary of State, (573) 751-4153, by filing a Fictitious Name Registration.

Corporations file articles of incorporation or articles of organization (LLC). Also be sure to read about federal requirements for LLCs. LLCs can file online. S-corporation status requires that you form your Missouri corporation or LLC and file IRS Form 2553.

Missouri business taxes:
Contact the Missouri Department of Revenue to complete tax forms based on your business activity including products sold and used in your business. Call the Sales/Use Tax Division with questions: 573-751-2836.

If hiring employees:
Obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service (Apply for an Employer Identification Number (EIN) online). Obtain a Missouri Withholding Number (form 2643) and an Unemployment Tax number (form 2699). Complete the application for these numbers online with the Department of Revenue and the Department of Labor and Industrial Relations.

Check with your local city/county:
Business licenses and permits are issued at the local level in Missouri. Look up city clerk numbers here or for KCMO, contact John Pajor at KCBizCare by calling (816) 513-2492.


Next Steps for Starting a Business in Kansas

Or perhaps you're going to hang your shingle on the Kansas side, Take a beat to check out how to start a business in Kansas.

Register your legal structure:
(NOTE: Sole proprietors and partnerships DO NOT need to register.) Corporations must file Articles of Incorporation, LLCs must file Articles of Organization, and Limited Partnerships must file Certificates of Limited Partnership. Filings are available at Kansas Secretary of State.

Kansas business tax:
Kansas has 12 types of taxes. Find out about Business Taxes (PDF) and then use the Business Tax Application (PDF) to file the appropriate form.

If you are hiring employees:
You will need to obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service. Apply for an Employer Identification Number (EIN) online. (Hint: you may also need an EIN to file your tax registration with the Department of Revenue). Go to the Department of Labor for information about worker’s compensation, unemployment, etc.

Check for city/county licenses and permits:
Contact your local city/county to see if licenses and permits are needed. Lastly, check with Professional Licensure in Kansas requirements for information on industry-specific regulations.


Need some hand holding?

Wow, that was awesome, and a lot to process. If you want to chat with a person about all of your options, contact one of our Resource Navigators at 816-235-6500.

Sources: Kenner & Speck, LC, UMKC SBTDC, Legal Zoom
 

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