One of the entrepreneurial questions I’m asked most (some friends were asking me last night which inspired this posting) is in regards to the legalities of forming a business. I’ve formed so many LLC’s and “Incd” (that’s lingo for incorporated) so many companies that it’s no longer a very complicated process for me. In fact, I’ve had to find the easiest and cheapest methods available to form these business entities, and now I’d like to share them with you.
The name of the game is limit your liability. I put that in bold because it’s very important. As an entrepreneur, your going to take risks, a lot of them. Picture a corporation or an LLC as an artificial person that you’ve created. Now all of the business you do, the bank accounts you open, the merchant credit card accounts you start and the lease you sign will all be through this artificial person that you’ve created. If for some reason the business goes belly up or some one decides to sue you for any reason, they can’t go after you personally. They can only go after the LLC or corporation and its assets. So your car, your house, your money outside of the company is safe!
If the business can’t pay the bills, the business goes bankrupt not you, unless you’ve signed personal guarantees on anything (which they will most likely make you do when leasing a building, etc).
A sole proprietorship is the exact opposite of what we’ve discussed above. YOU are liable for your business and anything that happens to it. I don’t recommend this as your liability is far too great and you have no artificial person protecting you.
Anyone can start an LLC or corporation, for just about any reason. Whether you have a blog, a restaurant, an Ebay business or you’re a tutor, anyone can run their business through a company. In fact, it is very wise to do so. To provide a good example, I own a restaurant and I have plans on opening many more. What should I do? Open them all under my name or a corporation / LLC. Both would be wrong. I would open each restaurant under a separate corporation or LLC, thereby limiting each restaurant’s liability to themselves. So if one restaurant fails, the others are protected under their own corporations. That’s something they don’t teach you in college! It’s tricky at first, but gets much easier over time. It’s amazing how many novice entrepreneurs (my former self included) have jumped recklessly into ventures and not considered how to limit their risk exposure. It’s a crucial element of the game!
Now that you know why you need an LLC or corporation…it’s time to learn how…here is a very simple breakdown that will explain EVERYTHING you need to know:
- Corporation – Planning on going public? Then this might be for you. But if this is for a small business, you’ll probably want to form an “S-corporation.” If you form a regular corporation, you will be taxed on both the corporate earnings as well as your personal earnings, which means you’ll be double taxed. That’s no good! An S-Corporation stops that from happening. So you’ll most likely want to form an S-Corp. Drawbacks to forming a corporation are paperwork, record keeping requirements which very state to state and a large lack of flexibility. The main benefit from using an S-Corp is employment tax savings. So only the salary you collect can be taxed, not the profits you collect depending on the amount of shares you own.
- LLC (Limited Liability Company) – This is what I usually recommend to anyone who wants to start their own business. For all intensive purposes, an LLC is treated just like a corporation, BUT there is very little paperwork, almost no record keeping requirements, complete flexibility in ownership (have as many partners as you’d like), you can distribute the profits however you like and you are still protected by that “artificial person.”
- Sole Proprietorship – Don’t do it…
So odds are you going to want to start an LLC. Don’t go to a lawyer or accountant to do that! They’ll overcharge you for a service that a monkey can now do (I’m going to catch heat for that one)! There are plenty of online services that you can set this stuff up on. I use Bizfilings.com, they are very reliable and very fast. With a few clicks of the mouse and $150, you’ll have your very own corporation or LLC. A lawyer would charge you $2000. Thank me later….
On a final note, you can form your new LLC or S-Corp in any state you like, but I recommend forming it in the state you’ll be doing business in. Delaware and Nevada are both great places to form these types of entities because of their corporate laws and lack of taxes, while California is probably the most unfavorable place due to their minimum tax of $800 (you have to an annual $800 no matter what, unlike most other states) and their higher taxes. It all really depends on the business. Example: I own a restaurant in California…I formed that LLC in California. The various internet companies I own are mostly run through LLC’s in Nevada and Delaware because they’re based on the internet, not an actual physical location. So why not benefit from less taxes and better laws.
So that covers it all…now go start your company and get the ball rolling!