[Intro Music] This is Office Talk with Annette Stepanian.
Hi, friend. It’s Annette. And I’m back with another legal quickie episode. Now before we dive into this week’s question, I just want to give a huge thank you to all of you who have taken the time to leave a review on iTunes. It really means the world to me. And if you haven’t done so yet, and you’re getting a lot of value, please take a few seconds to give us a star rating review or take a few minutes just to write out a review. I love hearing the feedback. And it really helps our show get recognized and get out to more people. So thank you in advance for doing that.
So as for this week’s question, it’s a super common one that comes up from people who are maybe starting a business or they’ve been further along in their business. And at one point in time, no matter where you are in your entrepreneurial journey, you’re going to wonder to yourself, if I should form an LLC. Let’s be honest here, you’ve probably wondered that to yourself, too, right? You want to become an LLC. It’s like the sexy thing to do. Everybody’s an LLC. Plus, it sounds kind of cool when you have a business with an LLC at the end, right? But there are a few questions that I want you to think about before you determine whether or not forming an LLC is right for you.
So there are six questions that I want you to ask yourself before you determine the right entity. Now, what I’ve done is I’ve actually summarized all of these questions and the possible entity structures that you might want to choose from, and I’ve put it together in a fancy schmancy chart. And it’s available for you to download over in the show notes. And you can catch that annettestepanian.com/podcast/7. And that’s the number seven.
Now before we dive into the six questions, I want to remind you that there are a variety of entity structures that you can choose from. The most common ones are sole, proprietorships, partnerships, corporations, and LLCs. However, make sure to double check the Secretary of State’s website in the state in which you plan to form your business, because there might be some structures or entity formations that are unique to your state that are some sort of hybrid or some sort of mix of one of these more common ones. Okay? But I’m going to be talking about these four structures, and just assuming that that’s the kind of, that’s our menu of options that we have in front of us.
The first question that I want you to think about is: How much risk do you anticipate in your line of business? The riskier the line of work that you’re in, the more you’re going to want to form an LLC or corporation, in order to shield yourself from personal liability, The less risk there is in your line of work, maybe you can form a sole proprietorship or a partnership and then supplement it with affordable and comprehensive business insurance. Okay? ,So one example is, let’s say you’re a graphic designer, in my mind, that’s a line of work, that’s probably not going to be facing a lot of risk. As a graphic designer, you’re probably not going to be sued for product liability or personal injury, you’re not really exposing people to risk by doing the work that you do. There is some risk that maybe you might have to pay certain vendors or you might get sued by a client because they’re not happy with your work. But generally speaking there, your exposure to risk is pretty minimal. However, if you’re in let’s say, a food business or transportation business, or you’re creating some sort of product that people are ingesting, whether it’s you know, creams or some sort of homeopathic thing, I don’t know, I’m just thinking off the top of my head. In my mind, that is something that presents a greater risk for liability. And therefore, I’d really think about how am I going to shield myself from that, and maybe filing as an LLC or corporation is one of those options.
The next question is, what personal assets do you want to protect? The riskier your line of business and the more assets you have, the more likely you’re going to want to form an LLC or corporation. In contrast, let’s say you don’t really have a lot of assets to your name, and you’re pretty sure that your business is low risk. Maybe you can get away with being a sole proprietorship or a partnership.
But what if you have a lot of assets and your business is pretty low risk? Again, depending on your line of business, I would err on the side of caution and consider forming as an LLC or corporation.
Question number three is how many owners will the business have? If it’s just going to be a one man or one woman shop – a sole proprietor or single member LLC or corporation are available options. However, if you’re going to have two or more owners of the business, by definition, you can’t be a sole proprietorship. Okay? Because a sole proprietorship has only one owner. However, you can consider a multi member LLC, a partnership or a corporation.
Question number four is what are your long term plans for the business? If your plans involve getting investors or selling off your business in the future, I would consider things like an LLC, a partnership or corporation. Because a sole proprietorship, by definition means that the business owner and the business are one in the same, and you can’t sell a sole proprietorship. So if your long term plans involve selling off a part or your entire business, then I would really consider the LLC, partnership or corporation, because that’ll really allow you that flexibility to do that.
Question number five is do you have the resources to pay for filing costs and taxes and to keep up with the filing requirements? Remember, a sole proprietorship and partnership are for the most part pretty easy and inexpensive to get up and running. The LLC and Corporation have they have some filing requirements, and you’re gonna have to look to your Secretary of State’s website to determine what those requirements are. There are filing fees, and maybe there’s some upkeep, you know, you might have to file certain documents every few years or so just to maintain your LLC or corporate status. So what usually happens is if you’re just getting started and your funds are limited. Or you just don’t have the bandwidth to keep up with some of the administrative requirements. Or maybe you don’t even know if you’re really going to continue in this business, this is something that you just started, you’re going to give it a few months to see if you really want to do this, then you might want to start off as a sole proprietorship and then revisit the issue of forming as an LLC or corporation later on down the road as your business grows and you really feel like this is a business that you’re going to stick with.
And question number six is how should your business be taxed? With this last question, I really want you to pick up the phone and call your CPA or another tax professional and sit down and look at your personal financial situation and the business financial situation and determine what makes sense for you from a tax perspective. Sometimes it makes sense for you to be a certain type of entity because it gives you the ability to be taxed in a certain format that is more beneficial to you.
For example, you have passed through taxation, which means that the taxes of the company are reported on the owner’s personal tax returns. Now pass through taxation is available to you if your sole proprietorship, a partnership, an LLC or an S corporation.
In contrast, corporate taxation means that the corporation gets taxed on the profits. And then any payments that are made out to let’s say shareholders are also taxed on that individual’s personal tax returns. Corporate taxation is available to you if you’re an LLC, and you’ve been elected to be taxed as a corporation, or if you’re filed as a C Corp.
Again, this is a conversation that you need to be having with your CPA, so that you are making a strategic decision on the tax advantages that may come from a certain entity.
And here are a few more tips for deciding on your business structure. Don’t pick a business structure based on what everyone else is doing. Okay? It’s really tempting to think of “Okay, I’m starting a business everybody else is an LLC, let me do it too.” Take a look at your own personal circumstances, your own goals for your business and make the decision accordingly.
Recognize that you can always change your structure. As I mentioned earlier, you might want to start off as a sole proprietor just to give yourself some time to decide what the direction of this business is going to be, and then file as an LLC. So don’t think that this needs to be something you do right out of the gate.
And finally, visit your Secretary of State’s website to learn more about the business entities that are available to you in the state in which you’re going to be registering your business. The requirements vary from state to state, the fees do, even the structures that are available to you.
So that’s it for this episode. What I want you to do next is head on over to annettestepanian.com/podcast/7 and download that cheat sheet that I talked about at the beginning of the show, where I’m outlining these six questions that I just asked to help you determine the best business structure for your business work through those questions. And hopefully, it’ll help you make a decision on the best business structure for you. If you’d like to learn more about how to set up your business the legal way, then check out my video training called Set Up Your Startup where I walk you through the different business structures available to you how to choose the one that makes the most sense for you. We’ll also talk about how to register your business with your state and what licenses and permits you may need to secure for your business baby. And as an Office Talalk listener, I’m giving you guys a special discount. Through October 31 if you download the video training called Set Up Your Startup, you can save $50 off of that training. Use the code Office Talk – all one word at checkout. All the details will be in the show notes. So I got your back girl. Thank you so much for being here and I’ll talk to you next time.