The 3 Basic Business Structures

Woman looking at business papers

Quick disclaimer: I am not an attorney or an accountant, and I do not offer legal, tax, or accounting advice — I’m just someone who’s done a lot of business research. Make sure to check in with our own state’s legal requirements and speak with a lawyer and your accountant before you actually open your business!

I have a feeling that the type of woman who reads HER has about a thousand business ideas a week. Once you find the idea that simply won’t leave you alone — that sticks in the back of your brain like glue, that ignites a passionate confidence and an unrelenting curiosity all at once — that’s when you know you’ve got something.

But that’s just the beginning. Once you actually get going, the smartest move you can make is to get that sh*t registered. Don’t delay this step; there’s too much at stake. You might be tempted to delay after a quick Google search gives you a pile of jargon that’s equal parts confusing and terrifying, but power through that temptation. You’re a boss now; it’s time to get your bases covered. As you begin, you’ll either be a sole proprietor, or you’ll apply for an LLC or corporation.

Are You A Sole Proprietor? The one situation in which you’re not legally required to register your business is if you’re doing business under your personal name. You’re a sole proprietor, which is basically the same thing as an independent contractor. If Sarah Smalls provides writing services under her own name, she doesn’t have to register that. However, if you want to give your business a different name — say Sarah wanted to put The Writing Wizard on her business cards (no, it’s not a great name, but Sarah’s into Harry Potter), she’d be required to register this under “DABA”: she’s “Doing Business As” The Writing Wizard. This prevents people from hiding their identity behind a business name. The public has a right to know exactly who The Writing Wizard is, regardless of the International Statute of Secrecy.* This won’t give you any liability protection, however; if The Writing Wizard gets sued, all of Sarah’s assets are up for grabs. You will also be subject to the self-employment tax, which is sort of like paying your income tax and the tax your employer would pay — aka, double taxes! Which is, obviously, super fun.** But it is the easiest and cheapest way to get started. You can usually do this on your state’s website.

Are You A Limited Liability Company? If you’re worried about the risks of liability, the next step up is an LLC. That “Limited Liability” means that your personal assets will be protected if your company faces a lawsuit. An LLC’s income isn’t taxed like a corporation, but any profit you receive will still get that fun self-employment tax. In fact, things are a lot simpler in an LLC than a corporation — less rules to follow, no director meetings, no rules on how to distribute funds. You get a bit of both worlds here; the asset protection of a corporation, with the flexibility of a sole proprietorship. There are some rules, though. You’ll have to file separate taxes for your LLC. You’ll want a separate bank account for your LLC. And when you apply, you’ll have to fill out ‘articles of organization’ and register an agent. The particular rules vary state-to-state, so make sure to check. Another problem to consider is that not all states treat LLC’s the same. Some states regulate what types of businesses can be LLC’s; some actually do tax you like a corporation. But once you start growing and seeing a larger profit, you’ll probably want to get established as a corporation anyway.

Are You A Corporation? A corporation has extensive liability protection — it is it’s own legal entity, to a large extent, and it won’t end if you die (LLC’s will). Ownership and partial ownership, in the form of shares, are much more easy to transfer than with an LLC. For those reasons, corporations are much more appealing to VCs, if you plan on raising capital. And for smaller corporations (“S Corporations”), there can be certain tax benefits. But corporations are also extremely expensive to register, and come with all kinds of rules and regulations. You have to have a board of directors, annual shareholder meetings, officers, and more. It’s also quite a complicated application process, one which you’ll most likely want to hire a lawyer for. In fact, I’ll be honest with you: If you don’t already have a lawyer, you probably aren’t at this stage yet. And that’s not a bad thing; for smaller businesses, you can find much better profits with the simplicity of the other business types.

Wherever you are in your business growth, remember to apply for what makes sense right now, even if your dreams are bigger. If your income is limited and your risk is low, the simple sole proprietorship could be the best way to go — just be ready to adjust when the time comes.

*That statute is fictional, guys, calm down. It’s from Harry Potter.

** super fun = an annoying nightmare.

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