After Brainstorming and branding you have to determine your next steps for starting a business.
So you want to start your own company. But where to begin?
First you must pick an industry in which you can thrive, zero in on a specific product or service, and begin developing a business plan. Once you’ve secured any necessary funding, and mapped out your route to profitability, you can start opening shop–be it a brick-and-mortar location and/or a small business website.
But there are further serious steps to take in order to make it official. To legally operate, you’ll have to establish a business entity—whether it’s a limited liability company, a corporation, or a sole proprietorship. Each choice has its own pros and cons, depending on the type of business and your goals for the company. Not sure which one is right for you? Read on to discover the option that best suits your wants and needs.
Sole Proprietorship
The simplest way to start your own business is to form a sole proprietorship, or a one-person company. Relative to launching an LLC, it demands far less paperwork. All it takes is acquiring the proper licenses and permits (which varies depending on which state you’re launching your company in), and there’s no fee associated with filing a sole proprietorship application. (But if you choose to use a moniker different from your own, you’ll have to pay a small fee to file an assumed name certificate.)
Most small businesses are sole proprietorships, since they’re easy to set up and maintain, and you won’t have to file taxes separately (i.e., you report all income and business expenses as part of your personal tax return). You also don’t have to worry about any formalities when it comes to decision-making. Sole proprietorships are great for low-risk companies and owners who are looking to test their idea before forming a more formal business entity.
The downside of a sole proprietorship, however, is that it entails having no legal distinction between you and your company—so if your business goes bust or gets sued, you will be wholly liable. That puts all your personal assets—from your home to the money in your bank account—at risk, since they can be subject to liens placed due to unpaid debts incurred from operating your business.
Limited Liability Company (LLC)
By forming an LLC, you protect yourself from personally incurring any debts or liabilities associated with your business. Maintaining an LLC requires more work than managing a sole proprietorship (though less, relative to a corporation). Unlike sole proprietorships, LLC owners, or “members,” must submit regular reports to ensure their organizational information remains up to date. Laws governing LLCs vary (and some states don’t allow “single-member” LLCs), so be sure to look up the rules that apply in your state before you file for one. One important note: limited liability companies (LLCs) are not considered legal entities for tax purposes, which allows you to choose between filing taxes as a sole proprietorship or corporation.
Corporation
To incorporate your business, most states require you to file a fee along with the application. There are two types: C Corps—which are considered the “default” corporation—pay tax not only on their income, but also on whatever income they receive. On the other hand, S Corp shareholders report the business’ revenue as income on a personal tax return—so they only get taxed once, and avoid facing any corporate tax. (In other words, if you have an S Corp, you can write off your business’ losses on your personal tax return.) Though C Corps aren’t limited in terms of ownership (anyone and any number of people can own one together), S Corps are restricted to 100 shareholders max, all of whom must be U.S. citizens. S Corps are also more closely scrutinized by the IRS. So if you’re planning to sell your company (or ask investors to fund it) in the future, a C Corp might be the smarter choice.
Corporations are subject to a slew of organization and decisional formalities, such as adopting a set of bylaws and establishing a board of directors and officers. Corporations are also required to maintain meticulous records pertaining to key business meetings and decisions, and submit annual reports that detail them to the state. Similar to an LLC, a corporation is considered a separate legal entity from its owner—which means you will have to pay a separate tax return for your business. (Keep in mind that that can impact your company’s profitability.) On the plus side, your personal assets will be protected from any business-related debts.