Business Entity Basics: Protecting Yourself with an LLC or Corporation
In this episode of Startup Daddy, I talk about the differences between business entities. I explain Sole Proprietorships, Partnerships, Limited Liability Companies (LLC), and Corporations, and why it is so important to protect yourself.
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Recommended Resource for Filing Your LLC or Corporation Paperwork
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(A great discussion took place in the comments on this post, going into the subject in greater detail. Be sure to scroll down and read more.)
Thanks for breaking that down in plain English. I knew it was important to form a company but I was putting it off because it seemed so complicated. You not only explained things well, you made it easy for me to take action, so thanks!
Glad I could help. Good luck with your new venture, and keep in touch here.
Your link to your recommended legal website does not work.
Thanks for pointing that out. (I mistakenly had a capital where I needed a lowercase- The internet is more particular then my second grade English teacher!). It’s all fixed now.
I’d like you to address sole proprietorship. I am just starting an engraving business for electrical contractors. I can’t imagine being sued over nameplate tags and I have no large overhead to put me in debt.
My question is why go through all the trouble of incorporating when I could just file my taxes on Schedule C? I know there are some tax advantages to incorporating but for a small home based business does it make that much difference with time versus money?
You raise a great question. A lot of people decide to just go with the sole proprietorship and I believe it is actually the most common form of business. While a corporation has formalities that can be more than most entrepreneurs want or need, the LLC provides liability protection and tax advantages that usually more than justify the one time expense to establish it.
As far as not imagining being sued, I don’t think anyone thinks it will happen until it does. You’d be surprised how many people play the US legal system lottery. You may also be surprised about some of the tax advantages of having a home business, like being able to deduct a portion of your utilities and maintenance expenses. There are also big advantages to being able to establish credit in your business name. And finally, you may want to consider that when your engraving business becomes wildly successful, you will need to establish an entity before you could sell it!
I like to prepare for success. If business takes off and you need to hire help, get space, expand, etc., all of these things are easier if you already have an entity like an LLC. The good news is that if you do choose to stay a sole proprietor, you can always form the entity later.
Thanks for your question, and good luck with your business!
Wonderful blog you have here. I’m getting married in February so I think i’ll come by more often to see what you have to say. Thanks =)
Regarding an LLC, i’ve been holding off on doing this for a couple of reasons that I hope you can offer your input on and help me decide to become an entity sooner.
Reason 1: What state do I file in? I’m in California, but I heard there were some advantages of filing in states like Nevada and Delaware. I am an online business, so I wouldn’t mind doing this if it was beneficial. Would I need a registered Free Agent to handle the documents and forward them to me here in California?
Reason 2: I’m living with my parents (it’s not all that bad), as I my fiance and I decided both to move back to our parent’s homes to save money for our wedding (we’re saving about $10,000 between the two of us doing this). Anyways, i’m reluctant to put my parent’s address as the location of business, since I do business online at the house. What do you recommend I do here?
Reason 3: After filing an LLC, what stuff tax-wise needs to be done. I woul dbe so lost as to how to go about doing all of that. I could hire a cpa or someone in my area to do that for me for a small fee correct?
Reason 4: I was thinking of creating one main company, and then smaller entities beneath that main entity that could be sold in the future. Have you any experience with a Series LLC and do you think this is a good idea in my case? This way, I could keep the main company but sell of the smaller branch.
Lastly, Reason 5: How would I pay myself? Right now I guess you could say I’m a sole proprietor, and I just pull money out when I need it from the pot that’s been growing. I’m really anxious to begin an LLC, but I know the income from the business would go into it’s own bank account, so how would I (and how much would I) be able to pay myself officially.
I’m sorry for all of the questions. Your podcast really sparked some interest for me and I was just curious about what you had to say about my situation. Thanks Ian, all the best.
First, congratulations!! I wish you and the soon to be Mrs. Pat a lifetime of happiness.
Now to your questions- I think a lot of members of the community here can benefit from this information, so I’ll address all of your questions by number. Consider this small coaching session a wedding gift. :)
1. There can be some benefits to filing in another State. Delaware and Nevada have no state income tax, and I know a lot companies that have real estate (like when you own your office building) form Delaware companies, but I am not sure why. If you form a company in another state you WILL need to have a local registered agent, but the filing service can usually serve that function for you (I know my recommended resource will). To get the tax benefits I believe you have to do business in that state, but for any tax issues it is always best to check with an accountant. If you don’t have a CPA, I suggest you pay for a consultation with one in the beginning. Believe me when I say this is money well spent. Another benefit is that Nevada and Delaware have some tight privacy laws that some people like. I always file in the state I do business. Any time I have looked into it, it never ended up being worth adding the extra complications for me.
2. You’re being very practical, and should be proud of that decision. You are right that you should not put your parents address as your business address. I suggest getting a mail box account at the UPS store or the like. They give you an actual, physical address not a PO box. Check with the state if you can use the address as the official business address for your company, but at the very least, you can definitely use it as the mailing for your company. I use this for everything from my bank account to my business cards.
3.CORRECT!! Hire the CPA to set up your books and advise you about the things you will need to do to file your returns properly. They can set you up with Quickbooks or at the very least, advise you how to do it yourself.
4. An LLC can own another LLC. File the first one, and if you need to start another, that main one can own the new one. You may not need this though. I have successful started and sold a business with a trade name (DBA) that was owned by my company. I was able to build it up and sell the business by transferring the trade name, trademark and assets to the new owner. Its called “Good Will.” This is getting into legal stuff though, so I suggest you consult an attorney when you are in that situation. For now, file the LLC, and then you can register the trade names and trade marks of the new projects and list your LLC as the owner. If you need to convert these to full-on LLCs you can always do that later.
5. It is important to keep your business expenses and personal expenses separate. You will have a separate checking account and I suggest you get a separate credit card, preferably in the business name to start establishing business credit. I set up my business accounts and personal accounts at the same bank, so I can simply transfer money to my personal account and pay the personal expenses from there, instead of paying personal expenses with the business account. It’s an extra step, but online banking makes it easy. There are different ways you can approach paying yourself and the CPA (See question 3) will set all of that up for you based on what is best for your personal situation. Don’t worry, you will still be able to take money out as you need it (it’s your money!) but how you do it has tax implications, so that is why it is best to get that accountant.
Thanks for asking such great questions. It sounds like you have a great year ahead of you. Good luck with your wedding and your business.
This is awesome stuff, thank you so much. I think all I have to do it just do it and I’ll learn all of the little nuances along the way.
Thank you SOOOO much for this advice. It’s much appreciated. All the Best Ian, I’ll be subscribed to your blog looking out for more tips.
Great suggestions Ian. I’d like to add one question to Pat’s.
Q: I have not filed for a business name yet. I’m looking to do so in Delaware. I am looking to start an online business but it will be some time before I am online and actually seeing any transactions (probably late 1st qtr 2009). If I create my entity now (looking at LLC) so that I can get that out of the way, would I have to file anything in the way of 2008 tax filings or should I just wait until January to create the LLC? Thank you and keep the great suggestions coming.
I am sorry, but I can’t offer any accounting advice. An LLC can be a part of your personal return, or you can choose to have treated like a corporation for tax purposes. You can even get S Corp status for an LLC. You will have to check with a tax professional to find out about when you would include it in your returns.
I will tell you that finding a tax professional to set up your books, and guide you with your tax strategy is some of the best money you can invest. You are about to open yourself up to a world of tax advantages and you want to make sure you are taking advantage of all you have coming to you.
Thanks for your question, and good luck with your new venture!
Have to give you credit, not many people are doing what you do, in terms of setting up a business, mine future business is homebased and outdoor. You are making this so easy to set up.. Can’t thank you enough..keep up the EXCELLENT job..
My husband owns a construction company, currently set-up as a DBA. My questions is this, we are planning on buying an investment property, can we put the title in the companys name? We do not require any finaincing. Also, what are the tax benifits that we can use from buying the investment property?
@Laurie, Sorry for the slow reply. First, with a liability magnet like a construction company, you really should consider protecting your assets with an LLC or Corporation. As far as I know, you cannot use a DBA as the owner of property. As the DBA is just another another name for you, there is really no advantage anyway. There are MANY tax benefits of owning property and from forming an entity. Every state is different, and everyone has a different situation. You need to speak to an accountant to get some qualified advice and guidance, tailored to you and your husband. It will be the best money you ever spent!
First, with a liability magnet like a construction company, you really should consider protecting your assets with an LLC or Corporation. As far as I know, you cannot use a DBA as the owner of property. As the DBA is just another another name for you, there is really no advantage anyway. There are MANY tax benefits of owning property and from forming an entity. Every state is different, and everyone has a different situation. You need to speak to an accountant to get some qualified advice and guidance, tailored to you and your husband. It will be the best money you ever spent!
This is great infromation. Thank you so much I’m learning a lot and keeping everything you send me it’s a lot of insight that I need to begin. thanks again
i Have an Issue, i am Starting a Business (Low Current Products Sales & Installations) But i Don’t Know The Percentages of Distribution of the Profit by the end of year Knowing that we are 4 Partners. 1 is the MD, 1 is the Marketing Manager, 1 is Operation Manager and 1 Partner for Funding the Whole issue. So Can u Tell me any thing about How to Divide the Profit among Partners Or its a Matter of 100% / 4 means that each 1 Will take 25% out of the Profit. Also Shall i Make a Percentage for the Company its Self as to start building Company’s Capital?
Kindly Waiting a Detailed answer if Possible.
Thanks for Fast Reply
The percentage will have to be decided by all of you, hopefully before you start doing anything. If you decide on a Corp., it will also be the percentage of ownership. If not, then you should detail it in your partnership agreement.
i was wondering if you had any more links that i could go to start a LLC business because the states included are all american states and i am actually NIgerian
I’m sorry, but I don’t have that information for you. I’m not sure about the laws and tax implications for your country. You should talk to an accountant there, for some guidance.
Okay, I have a lot of questions on how to really get this business going right…so here goes!
Q #1- We have a flower arrangement business we (husband and I) want to start, we have BIG plans to grow this business or Big ideas, such as..we want everything we make to have the business name on it from pencils to notepads to journals, you name it. BTW the name of the business is 9 On the Vine. All of our items we want to make/sell will have scriptures written on it. Whether it is an arrangement or a pencil, everything.
With ALL of that in mind, what type of business entity do we choose? Also, it will be family owned and operated (meaning our children).
Q #2- We were wondering about how to get help in getting started with the ideas and also getting these things patented..guess that was a 2 part question. Like maybe getting help with funding or is that asking too much?
Q #3-In one of my previous discussions with you, I mentioned we also wanted to turn it into a cafe/gift shop in the future, when should we go for it? To start or later?
I know that is a lot to answer for now, so let me slow the pace down a bit and get these done first, I guess.
Thank you sooo much for all of your help!! This is the beginning of a dream for us. Just want to start off on the right foot.
me and my father decided to import from abroad to ethiopia,Africa…but we cant decide what kind of materials should we import? what should we consider in here?
hi I want to start a paralegal firm with my friend and we want to know how to put the summary together and make it sound great
Hey! I help people create business plans for themselves and to get financing and I assist with market research and strategy. Feel free to email me at TheBusinessPlansTN@gmail.com. BTW I’m loving Startupdaddy as a resource for businesses! I think this is great for all start ups!
Hello! Sir IAN I need your help Sir. M 18yr old. In 2017-18. M going to start my own. Business. Launching of my own app. I can’t share tht which typ of app. But little. It’s. like make. A networking. Soo easy for everyone It’s gona be a revolution in a market But. After it. M not getting a proper guidance about. FILE WORK. OR LEGAL. WORK. Or PAPER WORK where to start from. I need your help sir IAN. WOULD U PLEASE GIV ME SUGGESTION. WHERE TO START FROM. N WHTS. FIRST STEP I NEED TO TAKE. N HOW TO SECURE MY IDEA. HOW TO SECURE IT FROM COPY CATS THANKS
FAISAL A SHEIKH.
From INDIA **