[memberonly level=“Group Membership for Businesses of 2-5 individuals, Student, Individual or Solo-Preneur”] This workshop was…
When starting your business it’s very important to choose the right legal business structure.
The structures outline the registration mechanics, your liability within the business, the way you manage the business, how the business is taxed, and restrictions on selling the business. There are multiple legal structures, but the two most popular for small businesses are sole proprietorships and corporations.
This is the simplest form of business structure because, unlike corporations, the business is you. For example, if you are a pole instructor offering workshops or classes and you don’t intend to have employees. According to the Small Business Administration (SBA), “Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.”
Many choose sole proprietorships because they are easier to establish. There is little paperwork to fill out (none in some jurisdictions), usually no cost to start it, and you can work according to your own schedule. Other attractive aspects of the sole proprietorship include not having specific governmental guidelines to follow when it comes to operation and filing business expenses and income on the personal tax return. This means that all income and expenses would be on your personal tax return.
However, there are disadvantages to sole proprietorship. Since there is no distinction between yourself and your business, then there’s no distinction between your assets or liabilities. If you are ever indebted to someone or are sued, personal belongings such as your house could be taken to satisfy the debt. Also, many business loans are unavailable to sole proprietorships, so you will likely need to self-finance the business with personal loans and possibly buy items on credit. Since the business is an extension of yourself, anything you buy on credit will affect your credit record. Selling the business would be difficult since it’s under your name, so separating business affairs from personal affairs would be hard. Lastly, the business would no longer exist should you pass.
A subset of this model is a partnership. A partnership is when two or more people own a business together. Having an official partnership through either a limited partnership (LP) or a limited liability partnership (LLP) provides some separation financially and legally between the people that own the business. This means that you may or may not be liable for each others debts depending on the structure you choose.
Another subset of the sole proprietor model is the limited liability company (LLC). This is a very common model for solo-preneurs in the pole business space. They are very easy to set up legally and provide separation between personal and business debts and assets. You are also able to hire employees under this structure. You won’t lose your home to satisfy debts as the business is what is sued and not you.
LLCs are created in legally at the state level. If you move to a new state, depending on the laws of the state you moved from and the state you move to, you may need to dissolve the LLC or file special paperwork to maintain the business entity as a “foreign” entity.
You may want to maintain the business entity because of relationships with banks. The longer the business is in business, generally the more favorably banks look at your business for granting loans.
LLCs are filed in conjunction with your personal taxes. Most states require you to set up a trade name for how you will conduct business through the LLC so you may see businesses listed as “Name of LLC DBA Trade Name,” where DBA means “doing business as.” You may also run more than one trade name out of the same LLC legal structure.
The biggest advantage of forming a corporation over a sole proprietorship is that your business would be a completely separate entity from yourself and the business taxes do not show up on your personal taxes.
Incorporating a business is more complicated than a sole proprietorship because you have to devote yourself to spending a large sum of money and filing lots of paperwork, which time to finalize. Managing the business can be more difficult because you are required to follow both state and federal guidelines. Since your business would be distinguished from yourself, your personal assets would be separate from your business assets. If you were to have difficulty paying off debt or find yourself in legal trouble, you could lose equipment, but your personal assets would not be in jeopardy. You will also have to file separate tax returns since the business is a distinct entity.
If you ever want to sell your business, it’s easier to do so because it’s separate from you in the corporate model. If the owners change due to selling or if you die, the business will legally continue. Corporations also allow you to distribute profit (unless you are a non-profit corporation) to shareholders.
There are several forms of corporations that all have slightly different rules, benefits and drawbacks.
Most, but not all businesses will need an employee identification or EIN number also known as a Federal Tax ID or Federal Tax Identification Number. You get an EIN number by filing paperwork with the Internal Revenue Service (IRS). Get this for free here.
If you are a corporation, have employees (even as an LLC) or are a partnership then you need an EIN.
If you are a sole proprietor without an LLC then you may not need an EIN. Please note that many banks require an EIN for a business bank account or a business loan/line of credit.
Which Should You Choose for your Pole Business?
You should determine what is best for yourself and your plans, consulting a lawyer and/or trusted business advisor.
Ask yourself the following questions:
- Do you want a simple, self-financed business with little paperwork to start?
- Or a more complex business in which you can enjoy more protection over your personal assets and have employees to help you in your ventures?
For more information regarding sole proprietorships, corporations, and other legal structures, check out this simple table at the bottom of the SBA website.
Concerned about setting up the legal documents correctly? There are TONS of online services that will do this for you for a fee such as: