I’ve had an increasing number of business beginners question what is the proper legal structure for them. The quickest answer is to contact an accountant and a lawyer and figure it out. However, the beauty of the Internet is you have the capability to improve your knowledge capacity of a particular subject before making a decision.
Today we will get into some of the basics of business structures and what you need to consider when choosing the entity for your enterprise. I will include some helpful inks to online resources since I am not a lawyer or an accountant. That, coupled with the fact that a professional would need to take time to interview you to get an understanding of your goals and review your business plan with financial projections.
Let’s first get into the common legal structures:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Partnership (LLP)
- Limited Liability Company (LLC)
- Corporation (S-Corp, C-Corp)
- Professional Association
- Business Trust
Since this is The Solopreneur’s Guide, I will stick to those that apply for solopreneurs. This narrows our review down to three basic types: Sole Proprietorship, a sub-set of the LLC known as the Single Member Limited Liability Company (or SMLLC), and, yes, even a Corporation. Partnership and employee based business structures are obviously out.
When considering the proper legal structure, you have to take an assessment of the following aspects of your business:
- Risk and Control
- Continuity of Existence
- Expense and Formality
The three primary differences between setting up a Sole Proprietorship versus a SMLLC or Corporation are taxation, liability and cost of set-up.
When it comes to paying taxes, in a Sole Proprietorship and SMLLC, profits / losses pass through to you to pay (or get paid) on your personal tax return. The IRS, on the other hand, taxes a corporation as a separate entity and only taxes you if the corporation pays you dividends.
When operating as a Sole Proprietorship there is no separation of liability. In essence, you are your business. Whereas with a SMLLC and Corporation, there is some liability protection should a disgruntled customer or company seek reparations if they feel you wronged them. However, before you jump into establishing a SMLLC or Corporation for fear of being responsible for reparations, there are other methods for controlling the consequences of liability. For example, you can purchase certain forms of business insurance or improve the conditions set forth in your contracts.
The third primary difference, as I mentioned, is cost. It is less costly to set up a Sole Proprietorship versus a SMLLC or Corporation.
I know, you’re still wondering which structure is best for you. And as I mentioned above, it depends. I chose to set up my copywriting, ghostwriting and small business consulting services as a Sole Proprietorship under The Solopreneur’s Guide. I believe in keeping it simply, while keeping costs down. I’m not pushing prescription painkillers or other life-threatening substances, plus I am anal about the contracts I create and sign.
Where can you go to get the answer for you?
CPAs and Lawyers
Less knowledgeable about the ins and outs of liability – tax or otherwise? Ask a colleague for referrals to a competent CPA and lawyer or do a Google search in your local area. This, typically, will give you the greatest resource to ask questions and established a structure based upon your specific needs. However, this will also be the most costly.
BizFilings.com is an excellent online resource for reviewing information. They offer a matrix to compare business types. Additionally, they provide a service to set up the legal structure of your choosing and another service for applying for the necessary licenses based upon your business type and location. They are quick, efficient and relatively inexpensive.
Your biggest business liability, most likely, will be paying the taxman. You can do a search on other sites, but why not go to THE site – IRS.gov.
Hopefully, this post will give you good insight where to start. If after reading this and reviewing the links herein, you still feel cloudy about the appropriate choice, contact a CPA and a lawyer.
All the Best,
The Solopreneur’s Guide