It’s a shame that people can start a business without choosing a business structure (by default, it’s a sole proprietorship or partnership, in the case of two or more individuals, unless you file paperwork for other types of business structures). Most entrepreneurs aren’t well-educated on what each business structure’s benefits and drawbacks are, and many find out the hard way that a sole proprietorship puts them at risk.
So why do so many business owners not form a business structure right away?
1. It Requires Too Much Paperwork
I’m not going to lie. Forming a corporation or LLC does require you to fill out a few forms, but no more than you would at your doctor’s office. You can take care of the paperwork in an afternoon, or hire a business filing service to do it for you. And an hour or two of effort filling out your business structure paperwork will net you years and years of benefits, so it’s well worth the small time investment.
2. It’s Harrrrd!
Quit your whining. Forming a corporation or LLC isn’t rocket science. If you were bright enough to start your business, you certainly can handle this decision. If you’re envisioning a pile of legalese paperwork, you’ll be disappointed. Business filing documents are written for the average person, so you don’t have to be a lawyer (or hire one) to understand them.
3. It’s Too Costly
It really depends on where you live as to how much you’ll pay to incorporate your business or file an LLC, but typically you’ll pay under $200. If your business is worth your time and effort, shouldn’t it be worth this modest expense to ensure that you protect your personal assets and keep your business running smoothly?
4. You Don’t Know In What State to Incorporate
Maybe you’ve heard that Delaware and Nevada are good options to incorporate in, but you’re not sure which to choose. In general, you should consider incorporating in your home state (where you do the bulk of your business). While you can choose a state that’s more tax-friendly, you may still have to adhere to the business laws in that state, and even pay additional fees if you don’t do business there. Some states even require that you open a business bank account in the state you incorporate in, which could prove a challenge if you don’t actually live or work there.
5. You’re Not Sure Which Business Structure to Choose
LLC or corporation? S-corp or C-corp? It can be overwhelming to know which the best business structure is. You can always consult a business filing service or a lawyer about your options, but in general, most small businesses choose one of the following:
- LLC (Limited Liability Company): In an LLC, the owner’s personal assets are shielded from business liabilities just as they would be in a Corporation. In addition, the IRS views the LLC as a “disregarded entity.” Thus, an LLC does not file separate taxes; company profits and losses flow through to the owners and are subject to each owner’s individual tax rates. The LLC is great for a business that wants liability protection, but seeks minimal formality. It’s also the perfect structure for a business with foreign owners since anyone (C Corp, S Corp, another LLC, a trust, or an estate) can be an owner of an LLC.
- C Corporation: This entity is not recommended for small business owners. The C Corp is ideal for a business that intends to raise capital by issuing stock or attracting investors through VC funding.
- S Corporation: An S Corporation is great for a small business owner who can qualify: The IRS places limits on the number of owners and who can be an owner in an S Corporation. Plus, all owners are taxed based on their percentage of ownership.
Rather than continually coming up with excuses on why you haven’t incorporated or formed an LLC, why not put that energy toward actually changing your business structure? Take some time to educate yourself on the different business structures. After all, your business is worth it.
Hard Work Photo via Shutterstock