3 Benefits You Should Consider When Choosing Your Business’s Legal Structure

Starting your own company is hard enough; selecting the most appropriate legal structure for your business can be confusing as well. There are many business entity forms to choose from — each having its own set of benefits and caveats — so you must decide wisely, since these are essentially the legal rules and processes under which you and your business will be operating.

This affects your taxes, legal liability, and how you share ownership in your company, among other things. So if you’re just starting off, we think you should keep these benefits in mind. This list is by no means exhaustive, but is a good starting point. Of course, please confirm all advice with your accountant.

1. Sole Proprietor

If you’re a one-person shop, sole proprietorship is normally the simplest and cheapest structure to start, though that doesn’t mean it’s the cheapest to maintain (especially during tax season). It also comes with unlimited liability, which can be worrisome. Still, in many states you simply apply for a license to do business, and report profit/income on your personal taxes. I’ve never used sole proprietorship as a legal structure simply because, even as a contractor, my personal tax situation was better served by other forms. Plus, you can avoid unlimited personal liability by using an alternate legal form.

2. C Corporation

A corporation, or C corp, separates the business entity from its owners, which provides strong protection from personal liability. And unlike many other legal structures, a C corp can sell shares to non-U.S. residents, making it easier to accept foreign investors. But a C corp also comes with double-taxation; that is, the business profits are taxed, then you are taxed again as a shareholder on dividends paid. So unless you are planning on selling the business or taking it public, the LLC form may be better for you.

3. LLC

Limited Liability Company, or LLC, is a good hybrid of the two forms discussed above. LLCs keep the limited liability benefits of a corporation while avoiding double taxation, and there are several “elections” you can make with the IRS to change the cost of filing at the end of the year. Most accountants I’ve worked with charge for your business and personal filings separately if you own an LLC, which is important for sidegig-style startups that are low on cash.

We use LLC and see a lot of LLCs in small, bootstrapped startups. But every business is different, so do your research and read up on the benefits of each structure, so that you’re prepared for discussions with your accountant and/or tax professional (especially if you’re being billed by the hour). We can also help you find the right incorporation service, as well as provide other assistance — reach out and we’ll tell you how.

3 Easy Ways to Incorporate your Business Today

Congratulations! You’ve decided to start your own company. Your business plan is complete and you’re ready to hit the ground running. Before you go too far, however, be sure to take care of one of the most important aspects of being an entrepreneur: setting up the legal entity for your business.

This step is important because it provides legal protection for both you and your company, especially in areas like copyright and taxes. It’s also a signal to yourself and the world that this is a serious business effort.

Legal Structure

Before setting up your business, you’ll need to decide which legal structure to use, such as sole proprietorship, LLC, C-Corp, etc. If you’re not sure which type to choose, there are a variety of online resources that can help, including those mentioned below.

Tax ID Number

All businesses require a tax ID number. For all but sole proprietor, you’ll need to establish a Federal Employer Identification Number (EIN), which can be done at the IRS website, www.irs.gov. You can use your Social Security number as your tax ID number for a sole proprietorship, which also means you’ll file your business taxes as part of your personal tax return. You’ll also need the EIN to open a business checking account.

Manual vs. Online

Like most things these days, setting up your business is easier to do online than manually. We suggest trying it manually the first time, which will help you better understand the process as you deal with each state and federal agency. But if you choose to do so online, below are three resources we recommend.

Three Online Resources

  • IncFile.com is an easy-to-use site that supports more business types and states than many other incorporation services. It’s also one of the more affordable ones, providing good value.
  • IncForFree.com is a free yet commercial website for incorporating a business.
  • Many states allow incorporation online, usually through their Secretary of State’s office or other government web portal. For example, for the state of New York, visit www.dos.ny.gov/corps/online_filing.html. A state filing site, however, may not provide some services such as registered agent, which receives official notices for your business and passes them on to you. This is helpful if you think you will moving to another state at some point during your business ownership.
  • LegalZoom.com is probably the most popular service, due to their ubiquitous television commercials. They provide host of legal services and documents, and are still very affordable.

These are just three of many online resources that can help you set up the legal entity for your business. Before choosing one, research their history, read their user reviews, and make sure you don’t end up paying for additional services you don’t need.

If you have any questions or would like more information about incorporating your startup, please let us know. We are happy to help entrepreneurs like you get your business off the ground.