Disclaimer: I am not a lawyer or any law enforcement agent. Every country, state and city have their own rules. Please contact a specialist for any legal consents. Do not take this article as legal advice.
What type of business structure should my business have?
Use your best judgment to decide what type of structure you want to use for your business. It’s always good to know what other structures there are and what are their differences.
What is a Business Structure?
This decide how your business will be charge taxes, how it will be managed, and how it will protect you from any lawsuit.
I will be brief what they are, and I will encourage you to search all their cons and pros. Try to see what is best for your business and your budget. Keep in mind that if your business blooms more, you can upgrade your structure.
- Sole Proprietor
Sole proprietor- one person owns the business. All his/her assets are not protected if there is a lawsuit. You only pay your income taxes.
Partnership- same as sole proprietor but with two or more owners.
LLC- can be own by one or more people. Your business stands on its own without affecting your assets in case of a lawsuit. You pay income and federal taxes.
Corporation- same as an LLC, depending which one you get; it gives you some privileges. Taxes are more complicated.
What do I suggest?
You’ll find many answers like start an LLC or something related. Some start as sole proprietor and later upgrade. Only few people suggest, that if it’s something safe to sell; start as a sole proprietor, but don’t fill any taxes until you start to make the real money. If your business fails, you can easily change it or shut it and start from scratch. The extra money you would be using for your LLC, you can use it for your marketing.
Why do I say that?
In the USA in every state, opening an LLC can be different. In some states you pay more than others. You pay taxes based on the city you live on and there are also state and federal taxes to pay for. Taxes are stressful and scary enough, plus getting your business up running. This ends up adding more pressure, especially if your doing most of the work. Thus, you have more chances of not doing your full potential in your business.
What type of structure did I opened?
This is where I made a mistake. I opened an LLC in California paid the annual federal tax of $800, the articles of organization ($80), business license from my city (~$89-120). Plus, other expenses, this was over $1,000. I was mostly scared that if I was ever lawsuit, I would not risk my personal assets but just the business itself. Later, I calculated my income with profit and losses, and you can already guess the numbers weren’t very pretty. My business was not risky at all. I was not selling anything dangerous nor copyright, but I was still scare of the possible lawsuit.
I know there are many points of view out there. I did my research before opening and I know everything was legal. But the uncertainty got the best out of me. I opened an e-commerce stationery store. No copyrighted characters or anything like that in it. My advice to you is to test the product or service, if it’s safe; before making it official. Instead of using the $1000 for an LLC, I would have used them for marketing, and such.
I would also recommend that if your business does require you a license or has a high risk for lawsuit or injury than take out an LLC or buy a business from someone already running one. Yes, it’s more money to spend but better safe than sorry. Some business examples could be construction, selling liquor, restaurant, etc.
This decision depends on the type of business that you are running. Research the risk and warnings your business might have. Most service business can run under sole proprietor. If you’re selling a product, make sure it’s not copyright, or you have the permit to sell branded merch.
Ok… with that out of the way and you’ve decided that structure should your business be, next is the licenses and permits.