Hey Guys. Welcome to the Business Bites Podcast. I am your host, Rachel Brenke and we are going to go down the legal path a little bit today talking about the different business formation options that you may have.
No matter what type of business that you’re in, whether you’re on-line-based only, you’re a brick and mortar out in the world, you need to be thinking about the best ways to insulate and protect yourself from liability because life happens, people happen, we’re all human, things may occur that you want to make sure that you want to make sure that you are protected from. This is especially important, not to exclude those that don’t necessarily have assets or family, but this is especially important for the individuals that do have personal assets and families to protect. Everyone should be thinking about having your liability limited and protecting out your personal assets from your personal assets.
There are some of you who are probably listening to this podcast and are thinking, “Oh, well, I’m just new in business. I don’t need to think about this,” or the other really most common one that I always here is, “Well, I’m not making a lot.” Let me tell you guys, liability does not discriminate. Liability does not care how much or how little money that you are making. Things can happen, even if you are one of those that follows all the contracts and laws to a T, things can still occur. I want to run over really quickly the business formation options that you guys need to be mindful of and really make serious plans to dive into.
The first one is a sole proprietorship. Here, in the United States of America, if you put yourself out like if you’re just engaging in business, whether it can be an on-line blog with a couple of affiliate links, or maybe you’re a photographer that’s working part time, or you could be a full-fledged studio, but if you set yourself up, and you’re engaging in business, whether or not you have filed any anything or whether or not you’re making a lot, you are considered a sole proprietor.
I want you guys to imagine for a minute a bucket. That bucket is your sole proprietorship. You’re gonna put all your business assets in it and all your personal assets there is no division. Everything is in that one sand bucket, so when that liability wave comes along and knocks it over, all of the assets get knocked over. All of your personal assets are touched at the same time. A lot of businesses start out as sole proprietorships because it is one of the most cost effect. It’s very cheap, and it’s the default one. You don’t necessarily have to do filing unless you are working underneath a business name that is not your own legal name. A lot of this developed just rising out of the default of being in business. The unfortunate part is there is absolutely no liability protection with just the structure of a sole proprietorship. There’s also not any tax benefits, as well, ’cause everything is connected to your social security number, 100% is attributed to you.
The next two business structures are the ones that I really strongly recommend that you guys consider. We either have the limited liability company or an LLC, which is the one that I highly recommend for most small businesses and entrepreneurs, especially in the creative field, or a corporation. These are a little bit more advanced, but not so much outside of the realm that you guys couldn’t figure it out. Trust me, if you’re figuring out how to use Facebook and the Internet and all the other technological gadgets that you have to have in your businesses, you can figure out how to choose one of these business structures, and you can either do it yourself, or it’s really recommended to have an attorney assist you.
But, an LLC or limited liability company is one that allows for two buckets. Remember with the sole proprietorship, we had one bucket with all our business and personal assets. For LLC’s, you have two buckets, one bucket for your personal assets and a different bucket for your business assets. This allows for if a client or customer or someone tries to come sue you or put a claim against you, they will hopefully, and we’ll talk about in another episode, how not to pierce the corporate veil, but hopefully, they will only knock over that business bucket full of assets and not touch your personal asset bucket. Two separate buckets on the shore, and a wave comes along, hopefully, and it should only grab and knock over the business asset bucket, which leaves your personal stuff insulated.
Corporations work in the exact same fashion with a separate bucket liability protection, as well. There’s a bit more intensive formalities that are required with corporations, and these really are strongly recommended more when you have multiple players in the business. There’s other circumstances as well that you can have evaluated by an attorney and a CPA. Just keep in mind that LLC or corporations are really where you guys want to focus your business formation creation and structure upon because of the separate liability bucket protection.
I’m a big fan of LLC’s, especially if you’re only starting out, but even myself, with being in business for over 10 years, many of my companies are LLC’s, as well. It affords us a separate liability bucket protection that an LLC or a corporation would, but there’s not as much formalities as a corporation requires and there still are tax benefits that come along with having an LLC. There’s specific elections that I take with the IRS. It’s that middle ground. If you look at it from the scale, you’ve got the sole proprietorship on one end with basic zero liability protection arising out of your business formation. At the other end of the scale, you’ve got the corporations with the separate liability bucket protection and all the extra corporate formalities. It’s a little bit more expensive. In the middle is really where the LLC rests.
I encourage each of you to go out and research for your specific state these different three business formations and see what suits your business the most. I think a lot of you will find that an LLC is the most beneficial. It’s fairly cost effective. It’s a very small investment to put into your business to get that separate liability bucket protection. There is not a lot of corporate tech formalities that come with an LLC, so it is the best of both worlds as far as cost effective, easy to set up, easy to maintain and then not really a lot of corporate formalities. All states are gonna vary depending on the set up LLC registration fee, and corporations, as well. All the fees are gonna vary. The formalities that are required, as well as there’s a yearly fee.
I strongly recommend that you guys get into this information, put it into your business plan, if you are not already set up. If you are already set up, see if you can get a legal assessment and a tax assessment. Those are two separate things. Please do not go a CPA to set up your business. They know nothing or shouldn’t be advising you, ’cause they’re not lawyers, on the legal aspects, just like lawyers, typically, aren’t CPA’s. If you can find one and the same, that’s great, but you want to have a legal advisement, and a CPA tax advisement, just to see if your position has changed since you formed your business.
Newbies, if you haven’t set up and when I say newbie, I mean new to this business structure formation. If you haven’t set one up, you’re probably a sole proprietor right now. Please consider moving into LLC or corporation. If you are someone that’s already an LLC or a corporation, please strongly consider getting those evaluations done on the tax side and the legal side and stick that into a routine schedule. Just have this evaluation done just to see if there’s any tax benefits that may help you as you grow, any changes that are worth noting because hopefully, your business is growing, flourishing and succeeding and with that your circumstances and liability needs change, as well the protections measures that you need. We just to make sure that everything’s on the up and up and you’re doing everything properly. Keeping in mind that LLC’s and corporations are typically formed at the state level and the sole proprietorship and filing of any doing business as or dba’s, fictitious name or assumed name certificates are done on the City or County level, depending on where you live.
My big recommendation and take away for this. The action items for you guys is to dig into the business formation structure that gives you the separate liability bucket protection. Get a consult with an attorney and a CPA, just so you can get the evaluation of the best liability protections and tax benefits for you and stick it into your business plan and budget to get yourself into the separate liability bucket protection structures, so you’re not leaving yourself wide open. There is a broad variety of things that you can do to insulate yourself from liability and this is just one. Other things are the use of contracts, the use of liability insurance, but they all start at the core with business formation, so please go, check it out. Put it into your business plan and I wish you guys separate bucket liability protection going forward.
Rachel Brenke is a lawyer, author and business consultant. She is currently helping professionals all over the world initiate, strategize and implement strategic business and marketing plans through various mediums of consulting resources and legal direction.
Hi, I’m Rachel Brenke
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