Legal Structures
This part can get a little tricky. Generally speaking, many entrepreneurs that are looking to be self-employed rather than run a huge company tend to stick to sole-proprietorships or LLCs. If you're planning on raising money most venture capitalists favor Delaware C Corps. We’ve listed a brief overview of the different legal structures below, but it wouldn’t be right, nor legal, for us to tell you what’s best for your company. When in doubt consult a lawyer!
In this article, you’ll find an overview of the following legal structures:
Limited Liability Company
Sole Proprietorship
Limited Liability Company
A legal business entity that exist separately from the owner, allowing for decreased personal liability. Registering as a LLC protects the owner(s) should the company face a lawsuit, bankruptcy, or other debts.
Each state may use different regulations For tax purposes, an LLC may be *treated* as a corporation, partnership, or sole proprietorship depending on how you file and what elections you make. Owners of an LLC are called "members." Members can be individuals, other corporations, LLCs, or even foreign entities. Unlike an S-Corp, an LLC can have unlimited members. You'll need to set up an operating agreement to outline each company member's rights and responsibilities. An LLC gives you more tax benefits and options than a sole proprietorship, while requiring less paperwork than a corporation. With an LLC, the owner enjoys the benefits of a pass-through taxation structure and chooses whether to be taxed as a partnership, corporation or as part of the owner’s personal tax filing Although there are enhanced tax benefits there are more upfront cost (varies by state) and there may be recurring annual fees.
There are different types of LLCS including:
Single Member LLC - comprised of one member
Multi-Member LLC - comprised of multiple members
Non-Profit LLC - companies that are not for profit, but may still require liability protection
Professional LLC - individuals with a professional license like a doctor or lawyer may consider creating a PLLC
Fun Fact: Facebook started as a Multi-Member LLC
Who should consider a limited liability company?
LLCs can be a good choice for businesses with medium to high risk of unforeseen financial liabilities (ex: injury, lawsuit, debt). You should also consider an LLC if you have significant personal assets. Lastly, owners who want to pay a lower tax rate than they would with a corporation should consider an LLC.
These days there are many there are many websites that exist specifically to help you register your LLC. This includes Tailor Brands*, Zen Business, Legal Zoom, and Bizee. These sites do most of the heavy lifting and offer additional assistance once you’re all set up. Just be careful not to pay for services that you can do yourself for free. EINs are FREE and take less than 5 minutes to set up. Unless you’re rolling in cash, there’s no reason to pay $99+ for someone else to set it up for you! You’ve been warned!
*The Brazen Club is an affiliate of Tailor Brands and may receive a cut if you use the link given above. There’s no extra cost to you and it helps us a lot :)
Sole Proprietorships
The simplest and most affordable option, a Sole Proprietorship is an unincorporated business run by an individual.
Quick Facts:
Most businesses in the US are Sole Proprietorships
Your company is automatically considered a sole proprietorship if you do business activities, but do not register as any other kind of business
As a sole proprietorship you enjoy all of the profits, but must also suffer all losses.
Your finances and the companies finances are one and the same. If the company is sued, all of your assets are at risk. You can use your own name or apply for a "DBA" certification (Doing Business under an Assumed Name).
Keep in mind:
Personal assets are at risk.
You are personally responsible for all debts and liabilities
Raising capital is difficult. Most sole proprietors rely on savings, loans, or investments from close friends and family If you die (when you're nice and old and sleeping in bed) the company dies.
Who should consider a sole proprietorship?
consultants
contractors/freelancers
authors
home-based business operators
mom and pop shops (small brick and mortar)
Stay tuned for a part 2 where we will be discussing corporations and nonprofits!
