April 25, 2019
So, I have to hand it to you… you’ve made sure you’re prepared for any legal funny business that your clients or the internet police might try to pull on you. That’s awesome!
You’ve done a lot of work, it’s true. And I’m proud of you! But there’s definitely more you can do to protect yourself and your assets from a legal standpoint.
At this point, I bet you’re thinking, “Sheesh Christina, enough with the contracts already. I get it! What else is there to be done?!”
Well, as your fellow creative entrepreneur turned friendly-internet-lawyer-superhero (but without the awesome supersuit, sadly), I want to help you legally protect yourself and your business in every way possible.
So today we’re talking about business structures – the good, the bad, and the ugly.
Many business owners don’t take the time to consciously choose the structure that benefits them most. Sometimes that’s because they’re accidental entrepreneurs, so caught up in client work and the minutiae of growing a business that they forget to go back and review this important foundational piece. For others, choosing a business entity is scary and overwhelming, and they feel like they don’t have enough information or support to make the right choice.
So let’s break it down! While there’s at least a dozen different ways you can structure your business, the three most popular forms for small time business owners are Sole Proprietorships, Limited Liability Companies (or LLCs), and S Corporations.
This is the easiest business structure to use… in fact it’s so easy, you might have already created a sole proprietorship without realizing it!
The good: Sole props are for people doing business alone (or maybe with their married partner). If you’re using your own name to do business, you probably don’t even need to register your business (check your local state laws). If you DO use a different business name, make sure you register a DBA (Doing Business As) so that the state knows who you are.
The bad & ugly: This type of structure doesn’t offer a lot of growth potential if you’re looking to grow big. Financial investors tend to shy away from sole proprietorships, and because you’re working alone, you can’t take on partners who can share the load with you.
As a sole proprietorship, you report your business earnings, income, and expenses with your personal taxes. You only pay taxes on what you’ve earned once… but make sure you make your estimated tax payments quarterly or you can find yourself in a hole at the end of the year.
The biggest disadvantage to having a sole proprietorship is that you are liable for all your business debts or any legal obligations. In other words, if someone decides to take you to court for damages, your personal assets (like your house or your savings) could be on the line.
LLCs are super popular with small business owners because they offer the flexibility of a Sole Proprietorshipwithout the financial risk.
The good: The biggest advantage of an LLC is your personal assets are more protected if someone comes after your business. You can operate on your own or have business partners. And when tax time rolls around, you can report your earnings and losses through your personal tax returns (unless you have partners). Basically… more protection than a sole proprietorship without the complications that being a corporation brings along.
The bad and ugly: Not every state treats LLCs the same, so the requirements for registration and incorporation can vary depending on your location. Additionally, with an LLC you’re often required to file paperwork every year to renew your status and let the state know you’re still in business. There also comes a point in your business where you’re paying more in taxes personally than you would be if you became a corporation.
If you have partners and want to get outside investment for your business, this might be the business structure for you.
The good: S Corps still provide liability protection, but the amount you pay in taxes can potentially be less because the company pays out salaries to the shareholders (who then pay income taxes) and any remaining profit can be distributed at a lower tax rate.
The bad & ugly:The requirements to register and maintain an S Corp status are a lot more onerous, including having to hold regular meetings with the other business owners and take minutes of those meetings!
Regardless of what business entity you choose to go with, I highly,highlyencourage you to separate your personal and business expenses – right now if you haven’t already done so. If your business becomes an LLC or S Corporation you’re required to do this anyway, but sometimes Sole Proprietorships tend to slide under the radar.
While you’re separating your finances, make sure you get a separate business credit card too, even if it ends up being another personal credit card that you use solely for your business.
If your expenses aren’t separated and your business is an LLC, you can end up forfeiting the protection that being an LLC offers. And don’t even get me started on how difficult the bookkeeping is when you’re trying to untangle what you spent for your business versus what you spent on yourself!
Have you taken a hard look at your business structure and whether it’s serving you? Why or why not? Let me know in the comments!
Feeling like you can’t move forward, and aren’t sure what to do next in your business? Check out the “Called to Create Workbook,” my guide to unsticking your creative genius and moving forward with confidence!
Wanna join up with other fab business owners get more tips and tools for growing your business? Join me over in the Law Law Land Facebook group!