Congratulations! You’ve decided to start your own business. It’s exciting. Maybe you’ve been thinking about doing this for a long time. Perhaps something in life pushed you to do it right now. Once the initial elation wears off, the reality can start to kick in, and you realize how many questions there are to answer. One of the most important questions is, do you set up as a business entity or not?
You can choose to run your business as a sole proprietor and do nothing. It’s by far the easiest option, but it’s also the one that’s filled with the most risk, in my opinion. When you work as a sole proprietor, you have no business entity behind you to protect you. If something goes wrong, you can be sued and held personally liable for any damages a client or vendor receives. Additionally, you will have to share your Social Security Number with your clients for tax purposes. The more places your SSN is listed, the more risk you have for identity theft. It’s not worth it to me to run that risk. Technically, this isn’t a business entity, but I include it because I know some people go this route initially. After all, it’s easier and free. By default, you’re a Sole Proprietor if you do business and don’t register as another entity.
It is one of the more common setups for small businesses. It’s relatively easy to register an LLC in most states, and the cost is minimal. Setting your business up as an LLC protects your assets. Your business assets and debts are separate from personal. From a tax perspective, it’s easy because you include your business expenses and income on your personal tax return. You don’t have to pay corporate taxes; however, you pay self-employment taxes for Medicare and Social Security.
If you are going into business with another person and are both going to be the owners of the company, you’ll need to establish a partnership. There are two types of partnerships Limited Partnerships and Limited Liability Partnerships. In an LP, one partner has more risk and more control. In an LLP, all are equal and do not have personal liability for the business. In an LP, the general partner must also pay self-employment taxes, but the other partners are not required to do the same.
There are other business entities you can create, but these are the three most common. For more detailed information, visit the Small Business Administration’s website.
Once you determine which type of business entity you will set up, your next steps are to establish prospering banking and tax record-keeping for your new business. Set up a business bank account with your bank or credit union and pay all of the business bills from that account. Don’t mix your personal funds with business funds. Keep the accounts separate. If you need a credit card to pay for items and you can’t get one in the business name yet, choose one you have and use that one card for business items only. The most important thing to remember here is to keep your business and personal finances separate.
You will also need to register for an Employer Identification Number EIN with the IRS. You’ll use your EIN to set up your business bank account, and it will be on any tax documents that you complete for clients. Learn more about establishing your EIN here
When you decide what type of business entity to set up, you should consider consulting with a lawyer and an accountant to choose the right options for your situation.
If you’re thinking about going out on your own and are trying to decide what type of business to start, request your copy of the Business Builder’s Guide today and find out what kind of business is right for you.