“A first decision?”
Yes, a first decision. What is your business structure? There are many articles that will talk with you about “How to Choose a Business” or “Am I ready to Own my Own Business”. But this post is for those of you who have taken the leap. One of the first decisions should be: What is THE Business Structure? Working through this decision will determine the type of protection surrounding you and your business.
Basic types of business structures
Let’s start with some basic types to choose from:
- Sole Proprietorship
Check out this article by the SBA on these different business structures and more: Business Structure and Tax Implications
Advisors who can help
But what if you read information but are still confused and not sure which business structure to choose. Here are two advisers that can help you decide:
As an accountant for small businesses, I work with businesses throughout the year to help with monthly financial records. Then at year-end, I turn the information over to the tax accountant to prepare the tax returns. But for the business structure, I recommend you talk to a tax CPA at the front-end.
It’s interesting, as I work with clients. Recently one client was going to split out his company in to two separate companies. He talked with his lawyer. The lawyer said: “ask you accountant what they think”. The client then called me. I pulled information together and collaborated with my associate, a tax CPA. All lawyers may not do this, but the point is: there is a tax perspective in addition to a legal perspective. The tax accountant is looking at the tax pros/cons of doing one business structure over another.
- If you want to keep the fee lower for the tax CPA: go in prepared. Take your estimated revenue, expenses, and profit.
- If you already have an accountant, ask them for advice. Many of us have relationships with tax CPA’s that we trust.
If you decide to do something other than be a simple sole proprietorship, go to a lawyer to have the papers filed. Some people go online, but I recommend a lawyer. You may be fine doing it yourself, but this is a critical piece to protecting yourself and your business. It is surprising to me that people will spend money on nice dinners or fun seminars, but then decide not to spend money on critical pieces to protect themselves and their business. When I made my firm an LLC, I went to a lawyer — one that had a lot of experience in filing LLCs. Because of her experience, it was not as expensive as I thought it would be and I had confidence that it was done right.
Business Structure: Sole Proprietor
What happens if your are thinking about the business structure, and end up doing . . . nothing? Well, assumptions will be made. The government assumes you are a sole proprietorship.
But what does that mean? Here are some key points for a Sole Proprietorship:
You are the business. The business is you.The Risk: if someone sues the business, they can come after you personally.
You can stay a sole proprietorship. But I recommend you take control, think about it, and consciously make the decision instead of doing nothing and having the decision made for you.
Business Structure: LLC
If you continue reading the document from the SBA, you will get a lot of information on the different structures. It includes information about sole proprietorship to partnership to corp. In addition, when you talk to a tax CPA and lawyer, they can fill in the blanks.
But as you are thinking through this, here are some key points about the popular LLC:
LLC (Limited Liability Company)
The LLC is pretty new. Wyoming was the first state to make it available in 1977. But generally speaking, it became available in the other states in the 1990’s. And, it is now very popular.
But if becoming an LLC takes time and money and some red tape – and the potential of hiring a lawyer – why do it? Why is the LLC popular? Answer: an LLC has better legal protection than a sole proprietorship.
You are NOT your business.
So, if someone files a lawsuit against the business, your personal assets are considered separate.
But remember, to get this legal protection, you are going more formal. This requires formal papers to be filed. (Note: you can instead become an S-Corp which also gives you legal benefits, but there are more forms . . . and more ongoing record keeping requirements . . . and different taxes that may or may not be better for you).
That’s why I recommend to get help and do it the right way:
- Get prepared and ask a tax CPA to hep you decide the business structure.
- Have a lawyer to file the papers and tell you what ongoing forms you need to file.
A key step in owning your own business is to decide the business structure. You can stay a sole proprietorship, but think it through and consciously make the decision.
Then if you go with an LLC or S-Corp, decide if you are going to decide the structure and file on your own or get help from professionals.