Deciding What Business Entity Is Best For You
You’re an entrepreneur! You’re leading with your passion, you’re excited about your purpose, and you’ve got that little extra skip in your walk! Why?
Because you get to define success on your terms and make an impact in the world (plus, you get to set your own schedule — duh!)
Your possibilities are endless!
Now for the fun part — the part that every entrepreneur LOVES to talk about — deciding what kind of business entity will you create?
Okay, so maybe it isn’t the most exciting thing you get to do as an entrepreneur. However, it is something that you can knock off your startup list fairly quickly. Plus, once it’s all said and done, you’ll be able to run your business with confidence, and a little extra cushion of safety!
Choosing a business entity is something that you definitely need to consider when stepping into the role of an entrepreneur.
While it’s not necessarily a requirement to choose the type of business structure you are going to have at this early stage, it can protect you financially and will also determine how you actually do business, collect money, and pay those lovely taxes. (T-minus a month until Tax Day! Wheee!)
In the US, the most common types of business entities are Sole Proprietorship, LLC, and Corporation. So, we’re going to roll with those and break them down for you, so you best understand the differences in these business structures.
Pour a cup of coffee or green tea (you might need it for this subject), grab a notebook to take notes, and let’s discuss what kind of business entity would serve you best, you little rock star, entrepreneur, you!
DECIDING WHAT BUSINESS ENTITY IS BEST FOR YOU
- No need to actually “set up” — you just “are” as is
- Easiest to use when you are first getting started
- Not actually a legal entity, but simply refers to you, the owner
- You are personally responsible for any debt and your income
- Can easily use this structure by simply setting up a DBA (Doing Business As) with your local city, which can be found by visiting the city website
- Get up and running quickly and easily with little to no expense
- Little to no ongoing formalities that you have to be aware of
- Can freely mix business assets and personal assets
- Common until people have more income and want to set up added protection and tax breaks
- May want to work with an accountant to manage income for tax reasons
- Liable for 100% of debts, losses, and liabilities of the business
LLC (LIMITED LIABILITY COMPANY)
- The newest form of business entity
- Combines the liability protection of a corporation with the ease and tax benefits of a partnership
- Doesn’t include the formalities of a corporation
- Very flexible
- You can be taxed as a partner or as a corporation
- You can have multiple members as opposed to a Sole Proprietorship where it’s just one
- Owners are protected from personal liability for company debts and obligations
- Can take advantage of “pass-through” taxation (can file business profits on individual taxes)
- Some cost to set up and maintain
- Annual fees and filing specific to your state
- A newer type of structure so limited information is available about how they perform long-term
- Some states do not allow LLC’s for certain industries
- A legal person in the eyes of the law
- Ability to buy and sell property
- Can be taxed and is more expensive to maintain
- May have lawsuits brought against it or bring a lawsuit against someone else
- Protects the owners (in most cases) from personal liability for corporate debts and obligations
- Has shares that can be distributed to employees or directors of the company
- Ability to raise investment capital
- Best structure if you’re looking to take the company public or easily raise money through the sale of securities
- Unlimited life
- Creates certain tax benefits under certain circumstances
- Require annual meetings and meeting minutes
- Require owners and directors to observe certain formalities
- More expensive to set up than the others above
- Often more expensive to maintain due to yearly fees and filing
Bottom line, when deciding how you want to set up your business, it’s important to look at both your short-term and long-term goals and seek out legal and accounting advice in your area.
Honestly, an accountant will be one of the best investments you ever make as an entrepreneur! (Scouts honor!) So don’t take this too lightly!
While this isn’t the most fun part of owning your own business, trust us when we say it feels great to decide where you are and dot all your “I’s” and cross all your “T’s” from a legal standpoint!
Once this is done, you’ll be free to run your business as you like, and that’s where the fun begins!
Another super fun item to think about, as an entrepreneur, is retirement! Don’t worry — we’ve got you covered! Head here to learn if you should save for retirement or invest in your health coaching business!
Comment below with what kind of business entity you have or are thinking about creating!