Tuesday, May 15, 2018

Small Business Blog: Selecting the right legal entity for your business

When forming a business, choosing a business entity should be next on your list of things to do right after choosing a business name. This can be straightforward or complex depending on your business. If you are a new business owner, seek out legal counsel to make sure you are selecting the business entity that is best for you.

The entity structure you select for your business should be specific to your business needs and future goals. Thankfully, there are not an infinite number of choices you can make when it comes to entity selection. Usually, business owners will choose from among the following options: Sole Proprietorship, Partnership, LLC, and Corporation. 

Here are five types of businesses that we frequently encounter. Whether you fall into one of these categories or none at all, your situation is unique and you should contact a business professional who can help guide you through the entity selection process. It will save you a lot of time and money to do it right the first time.

  1. The Professional

    You are a caterer, a therapist, an architect, or a wedding planner. You’ve worked under other people for years and now it is time for you to spread your wings and fly. You have been thinking about going out on your own for a long time and you have saved enough money to get started. You’re a little bit nervous, but you have a precise plan of action. You do not need any outside help, and you have no plans to give up control of your business to anyone else.

    If you are a professional, you want your business to maintain a professional image. In order to do this, you will incorporate (or organize) your business.  You may want to form an LLC, a PLLC, or a PC depending on your profession and the state in which you plan to do business. 

  2. The Scaler

    You are creating the latest technological wonder that will disrupt an entire industry, and you plan to go public one day.  You know you can’t do it alone, and you are seeking to network with angel investors and venture capitalists.  You need a lot of capital to make it work, but you know that with the right mentors and funding, your business will be huge. 

    You will most likely want to form a C-Corporation in Delaware. This is the entity of choice for most investors. The investors you want to please will feel safer knowing that your business was formed in the jurisdiction that is at the center of business law.

  3. The Influencer

    You decide to start your own YouTube channel where you advise viewers on the latest beauty and fashion trends.  You are happy with the rate at which you are gaining subscribers and getting views.  You are beginning to make some money and you are hoping to turn this into a full-time job soon.

    Depending on your goals, you have several options.  You can form a C-Corporation, S-Corporation, LLC, or other.  You should not be a Sole Proprietor unless you really enjoy taking risks. If someone gets harmed by a makeup product you endorsed, you might be on the hook for that harm as a Sole Proprietor.

  4. The Part-Timer

    You are a graduate student or recent college graduate who doesn’t have much in assets. You are doing odd jobs here and there to try to make some money for tuition and books next semester.  Maybe you are delivering groceries or lunch (Seamless, Grubhub, UberEats), driving for Uber or Lyft, tutoring (VIPKID, Magic Ears, Varsity Tutors), or pet sitting (Wag).  Some people say you should form an LLC or an S-Corp to save money on taxes. You are too busy to get professional advice, but you are curious whether you could save some money on taxes by doing this. See Should Independent Contractors Form an LLC or an S-Corp?. You may want to remain a Sole Proprietor.

  5. The Partners
    You and your best buddies want to start a business together. You are all invested, and everyone agrees that friendship comes before money. You have never started your own business, let alone with other people. To make up for lack of experience, you all have hard work, passion, and grit on your side.

Form a C-Corporation, an S-Corporation, an LLC, or even a Partnership. What matters the most here is that you hammer out the details of your business relationship in an agreement to save you, your friends, AND your family a lot of arguments and legal battles in the future. The more people you have in the business, the more time and money you should spend upfront to ensure everyone understands their rights, their roles, and their responsibilities.

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