LLC vs. Sole Proprietorship vs. C Corp: How To Register Your Business?
If you and your big idea are getting serious, it may be time to take the plunge and make the relationship legal.
So how do you figure out how to formalize your new business? Which structure do you choose and why? We’ve got you covered - at least for the basics. When you’re ready to dig down into more detail about taxes, distributions, and partnership payouts it’s best to consult your accountant.
Before registering your business with the state, you will need to settle on one of these common structures as well as acquire a federal tax ID number. Luckily most of these things can be acquired online so you can check them off your list from the corner coffee shop.
If you’re commitment-phobic, you might want to test the waters with a sole proprietorship. A sole proprietorship does not create a separate business entity and is appropriate if your business has very little risk (think freelancing or many service-based businesses). You can apply for a trade name and are in complete control of the entity since it’s all you.
The flip side is your business assets and liabilities are not separate from your personal assets and liabilities. You are personally liable for all debts and obligations of the business and you do not have any extra legal protection as you are the business. Actually, you are automatically a sole proprietorship if you conduct business but don’t register as any other type of business.
Limited Liability Company
With “liability” right there in the name, it makes sense that an LLC structure helps protect your personal assets because you are creating a separate entity for the business. An LLC allows you to take advantage of the benefits of both a corporation and a partnership with profits and losses passed through to your personal income without paying corporate taxes. For many, it’s the best of both worlds!
LLCs work well when you have multiple people with a stake in the business, have a relatively low-risk offering, and whose owners want to protect their personal exposure. Just keep in mind that members of an LLC are considered self-employed and must pay the associated taxes and Federal contributions.
Corporation or “C Corp”
A corporation has its own identity, well legally-speaking. It’s an entity separate from its owners and can make a profit, pay taxes, and be held legally liable.
Corporations offer the strongest protection for their owners but are more expensive to set up and maintain since they require particular record-keeping, ops processes, and reporting. Corporations have shares that can change in value, be bought or sold, and offered to employees as compensation.
If you are planning to raise money for your business, a C Corp is a good choice as it offers a tidy way to conduct valuations and allot shares to investors.
Benefit Corporation or “B Corp”
If your company is mission-based yet still has eyes on earning a profit, you might look at the benefits of setting up a B Corp.
Because B Corps are fueled by both mission and profit, the company is held accountable to produce a public benefit in addition to a profit. As a result, B Corps are subject to different reporting, processes, and transparency in order to demonstrate “public good.”
Once you decide which structure suits you best, there is no shortage of online providers to help your business (we will review these soon).But, be advised that unless you choose the route of sole proprietor, it could be difficult (and expensive) to change your business structure down the road.
When in doubt, always consult a professional!
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