One of the biggest steps you will need to take in creating your business, is protecting it. Many people feel either that they don't need to take this step, or they're too overwhelmed of the options to make a choice and follow through. However, this is a step that you really can't set to the back burner because you don't want to wish you had when it becomes too late.
Should you incorporate your business and why? When looking at starting a business, your intent should be to make money. You need to look at your business as a new entity. Look at it as an entity that you really want to keep safe, and to make sure you're actually hanging onto that money that you're making. You can do it as simple as something as a DBA, which is a formal step. You have told the world you have a new business. When you’re thinking about what you should do to incorporate, make sure you’re thinking about protecting your ideas.
What are the different types of ways you can protect your business? First and foremost, the first step you'll want to do is get a lawyer that you trust onto your dream team. Then when considering what structure to select, think of personal liability and tax responsibilities.
Sole proprietorship: With the sole proprietorship, the liability is still on the business owner. Your own personal assets will be on the line for what happens in the business. You will only be required to submit a DBA (Doing Business As), and since the IRS does not recognize the business as different from you, your taxes won’t change.
Partnership: This will act as the same as a sole proprietorship. However, you’re working with someone else. Again, the liability is on you. In this case, if your business partner does something, you could be on the hook for what happens. The tax piece is similar also; the taxes are what’s called flow through or pass through tax. Any money goes through the business, and then comes out separate on individual tax returns.
C-Corp: This is not typically used for a small business, but used more for larger companies who are looking to go public. You do not have the liability on your personal shoulders. However, tax wise, you pay double taxes. The business pays taxes, and then the shareholders are taxed on the business.
LLC: LLC is also known as a Limited Liability Corporation, and it allows you to take the business liability and leave it with the business. However, it also allows you to have flow through taxes. It then flows down to the members of the LLC. LLC is governed by partnership tax law.
S-Corp: An S-Corp is very similar to a LLC. However, with an S-Corp, you’re not required to pay a self-employment tax, which can provide you up to 14% more money in your pocket, and it will have flow through taxation. Now the S-corp has about a half a dozen nitty-gritty rules. If you’re not a US Citizen, you can’t have an S-corp. Also, look at the long-term of estate planning when determining an S-Corp. The other way they differ, in a LLC you can craft exactly how you want it. You can both own 50% of the company, but could have an uneven distribution of the money piece. But for an S-corp you can’t do that. If you both own 50%, you’ll both get 50% of the profits.
Can you change the structure of your business even after you’re currently in business? Yes, of course it’s best to pull in an attorney to help you. It’s definitely possible to change this. Make an appointment with an accountant first, and then run the numbers with that account to see what the different will be in taxes with that change. Then talk to your attorney about actually making that change.
Is there a difference between states when incorporating your business? There really isn’t a difference between states because we want to encourage trade between states. In order to encourage that trade, they make about 90% of the requirements the same.
What about doing the paperwork and filing yourself vs. having a lawyer take care of it? The filing piece is super easy. Most of them are two pages and have a reasonable fee. The tricky piece comes before filing ever happens. What you really want, if you want this to be long-term and profitable, should be to pull in an attorney to put together the forms for you. If you don’t make any changes, you’ll get ‘stuck’ with the default rules of the LLC, which may not be what you need for your business. You’ll want to sit with an attorney, and go over your goals for the business.
Can you update those forms if you’ve already filed? Yes, you can update or amend all kinds of stuff. You just need to know what you need to update. If you’re sued, you have to consider anything that’s been filed frozen. However, you can amend and change all the time.
Final Thoughts? Know what you want to protect. Your business structure is exactly like a sky scraper, you need to plan and build the foundation to be completely solid.
More About Tamsen: Tamsen Horton is the Owner of Vuja De Law, and helps business owners with legal plans. Her mission is to bring excitement and sexy back to law, and for it not to be the thing that business owners dread talking about. Tamara has also been kind enough to provide two great documents explaining business structure. Check them out below!
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