Why Your Small Business Needs a Business Entity
If you’re an aspiring small business owner and are serious about doing things the right way, first things first: choose a business structure before you sell your first product, service your first client, or generate a single dime. Sure, it seems tedious when you’d rather dive right into the glamorous world of entrepreneurship. But picking the right way to legally form your company will save you plenty of headaches (and potentially dollars too) later as your empire grows.
You’ve probably heard mysterious terms thrown around like LLCs, partnerships and the almighty corporation. No need to let your imagination run wild, I got you. These are simply different frameworks that legally govern and organize your business finances, ownership, operations, and liabilities. Depending on factors like number of owners, desire for personal liability protection, and confusing acronyms like IRS tax Form 1065 or 1120, you and your accountant can pick the structure that’s best suited for your small business.
Here’s a quick lowdown on the options:
Sole Proprietorship: As a one-person show, you report all income and losses on your personal tax return. Super easy, but zero protection if your business gets sued.
Partnership: If you have multiple owners, this allows you to share control and combine skills and resources. The downsides? All owners share liability risks and debts. So if your sketchy partner screws up, you could lose personal assets.
Limited Liability Company (LLC): The LLC gives owners liability protection along with the flexible tax and management options of a partnership . This has become a very popular choice for small businesses.
Corporation: Forming a corporation creates a separate legal entity that shields your personal assets if the business goes south (similar to the LLC). But there’s lots more paperwork and formalities than other structures.
Before formally establishing your empire’s legal structure, talk with business attorneys and accounting professionals. They can explain the nitty-gritty pros, cons, legal protections and tax implications to help you pick the right form based on your goals and risk tolerance. Yes, sweating the business formation stuff seems painfully boring and bland when you’d rather dive right into your passion. But laying the proper foundation now makes room for happier days ahead as your small biz grows.