"What's in a name? That which we call a rose by any other name would smell as sweet.” This sage advice from William Shakespeare's Romeo and Juliet pairs well with the dilemma many small business owners in the have when trying to decide on their business name and structure. From new wedding pros to more seasoned professionals, the industry sees too many people skipping over what could be a life or death decision for their business. Let us give you a quick walkthrough on how to protect yourself and structure your business in a way that works best for you!
I’m a Sole Proprietor!
This gleeful cry comes from more wedding and event pros than we care to admit. Probably because it’s easy to do and there's little or no paperwork to file. You will need to file for a business license no matter what; although the fees and process for filing may be different depending on your location and state guidelines. Depending on what name you choose to operate under, you may have to file for a DBA or ‘Doing Business As’. You will need to potentially file this document if the name your business is operating under is different from the name it is registered as. In some states, this works as a protection for the consumers doing business with you.
There’s not really a lot of hassle in becoming a sole proprietor. You pay taxes on the profits in your personal tax filings. However, that makes you personally responsible for any business debt or liability. There is no personal legal protection. Although, sometimes great risk comes with great reward.
The Value of Business Protection
Filing as an LLC (limited liability company) or INC (incorporation) has significant legal and tax advantages. At the core, they can help protect your assets from creditors and provide an extra layer of legal protection. However, both have pros and cons. If you decide to incorporate your business, that can have an enormous effect on how your business is taxed as well as its organizational structure, and how profits and losses are handled.
Here are five reasons to take a serious look at your business structure and becoming an LLC or Corporation.
1. Protection of Personal Assets
As previously mentioned, these business types work to protect your personal assets. The business lives as a separate entity, and you are not personally liable for any debt. So it means that should you, for some reason, be sued by a client, the business is the business- and not your house, car, or other money.
Just look at anyone who has an M.D., DDS, Ph.D., or ESQ after their name. People automatically add a layer of credibility to your business without knowing much about it. Adding LLC or Inc to your business name gains you some cred, and instantly adds legitimacy.
Both business types continue to exist if management or ownership changes. Whether you decide to eventually sell the business or have a family member or long-term employee step into management roles, the business is protected as a sole entity separate from you.
One-member LLCs are taxed at the same rate as a sole proprietorship. However, corporations are typically taxed at both the personal and corporate level – with some specific exceptions.
5. Deductible Expenses
Both business structures offer the ability to deduct normal business expenses, often including salaries.
Formation of an LLC
LLCs are a separate entity from you, the owner. An LLC will have its own Taxpayer Identification Number versus filing as part of your personal Social Security Number. You can be the sole owner or have multiple owners who run the business as necessary. Forming an LLC usually makes the transfer of assets reasonably simple. Making it easier to pivot your business or dissolve the company if necessary.
As an LLC, you are NOT personally responsible for business liabilities. You will have the option of filing taxes based on either your individual profits or the business profits – whichever minimizes your tax burden. If you are operating as a small business and aren’t looking at the need to raise outside capital, forming an LLC might be great for you. It’s a relatively informal business structure and is the most flexible business type.
Forming a corporation requires a standard management structure. You will need to establish a Board of Directors and gather Shareholders. You’ll be required to have shareholder meetings, keep minutes, and have very detailed shareholder records. It’s also required that all shareholders be U.S. citizens or residents. In many states, you’ll have to file an annual report – which comes with a fee. There can be a considerable number of filings and fees to meet the incorporation requirements.
Often small businesses will structure as S – Corporations. In its simplest form, it means that the company does not pay income taxes. Instead, any profits are passed on to shareholders who pay personal taxes. An S – Corporation is a closely held type of corporation that is taxed under Subsection S of Chapter 1 of the IRS. Overall, forming a Corporation could be a less flexible option. Mid-size and larger businesses typically benefit from incorporating either as an S-Corp or as a larger and more regulated C-Corp.
Know Yourself, and Act Accordingly
Only you know what business structure best fits your business model. The end goal is to protect your business and protect yourself. As always, Aisle Planner urges you to solicit the advice of a Legal or Tax professional before making any major business decisions. Seeking one-on-one advice based on your specific needs and business model is vital for the health of your business.
While online sites such as LegalZoom and Business News Daily can provide excellent information, knowing the specifics for your business model are imperative. You may also want to check out the IRS website or your state's .gov website directly to find out more about specifics regarding how to file taxes and get appropriate licensing for your business.