12.3. Choice of Legal Form
One of the first issues Deborah, Dave, and their professional advisors will confront, after weaving their way through the thicket of issues associated with leaving their current jobs, is what legal form they should choose to operate their new venture. Many choices are available.
The most basic business form is the sole proprietorship, owned and operated by one owner who is in total control. No new legal entity is created; the individual entrepreneur just goes into business, either alone or with employees, but without any co-owners. This entity will not be attractive to Deborah and Dave unless one of them chooses to forgo ownership and act only as an employee.
The default mode for Dave and Deborah is the general partnership. This is the legal form that results when two or more persons go into business for profit, as co-owners, sharing profits and losses.
Another choice available to our entrepreneurs is the corporation. This form is created by state government, as a routine matter, upon the entrepreneurs' filing an application and paying a fee. It is a separate legal entity, with legal existence apart from its owners, the stockholders. Deborah and Dave might well choose to form a corporation, allocating its stock initially between them.
A variation of the corporate choice is the subchapter S or small business corporation. If a corporation passes a number of tests, it may elect to be treated as a subchapter S corporation, a designation that affects only ...