In the world of business law, choosing the right entity is the first step in starting a new business. Business owners have the opportunity to choose between sole proprietorships, limited liability corporations, s-corporations and c-corporations. The type of entity chosen determines a lot of things including liabilities and taxes.
So, how does someone decide which entity is right for their business?
Look at the Size of Your Business
If you’re someone who is just starting out in business as a freelancer or independent contractor, your business entity will be different from a branch of a larger corporation. In this case, an independent contractor is better off requesting a 1099 form from businesses they work with. When it comes to filing taxes, the business owner will file the 1099 form as their income. Alternatively, the business owner could establish as a sole proprietorship. This will make the business “official” and licensed with the local county, but will not provide additional tax benefits.
For businesses that are larger in size, the business owner will want to consider another type of entity.
Why Limited Liability Corporations Are Great
A limited liability corporation (abbreviated as LLC) is a good option for smaller businesses just starting out for two reasons: 1) the tax benefits and 2) protections.
An LLC offers a business owner more opportunities to write things off when filing taxes. Things like office equipment, travel miles and business expenses may be written off under an LLC. The business owner still files personal taxes but will be hit less with taxes on the business side of things.
An LLC also protects personal assets should a business owner be sued at any point. The LLC offers defense and only puts up business assets. Instead of getting sued and losing personal assets like homes, cars and bank accounts, only the business assets are put at risk.
The cost and process to file an LLC is relatively easy too. A business owner needs to obtain a business license through their local county government and register for a business tax ID. It’s a bit of paperwork to get through, but is overall beneficial.
S-Corps & C-Corps
Larger enterprises will likely file as an S-Corp or a C-Corp. Because these types of entities require more paperwork and legal guidance versus that of a sole proprietorship or LLC, you’ll want to hire a business law professional with plenty of experience. Attorneys like those at Denver-based Scheid Cleveland take care of all required paperwork and ensure the entity is filed correctly with the local government. These types of attorneys help with the process from A-Z and are worth the retainer fee.
Establishing as the right entity is just the first step in successfully operating a business. You’ll also want to consider hiring a CPA who can help with tax preparation, a business coach who will advise on strategy and execution of various things, and a marketing company to help acquire customers for your business. Running a business can be stressful at times, but rest assured it’s well worth it!