Everyone wants to start a business and make money. They fail to stop and think the legalities of jumping into this venture. There is a lot more involved than just getting a website and they will come which is not necessarily the case. There are rules, regulations, taxation, insurance matters that have to be researched through or hire an attorney to help you navigate through the process to be sure you are properly set up to avoid issues later.
This article will go over the most common 3 types of business entry formation. There are some variations with the LLC and Corporation formations that are much more sophisticated that will not be covered in this article. Only going to cover the most commonly used business entity selections for small businesses.
Assumed name certificate AKA fictitious name certificate also can be called doing business as (DBA).
This entity formation Is the cheapest fasted way to become a small business. Get a certificate of good standing shows proof that have a business has the right to use that legal name as a DBA. For example, you choose the DBA name of "Blow your yard as your lawn" mowing business. The business name will be your name DBA your business name. The cost is much less for the assumed name certificate compared to forming an LLC or a corporation. Great way to test your business idea to see if your business will be viable financially.
Before you go and apply for an assumed name, make sure you have a few names picked out for your business. Having a few options helps you should the names you selected are already taken.
Here are the downsides to this type of business setup as a DBA.
There are No legal protections for an assumed name business entity setup. You and the DBA are considered the same. Please double check with your attorney for legal advice on this matter to better understand what your options are for business formation options for your personal situation.
An assumed name certificate or DBA gives your business a bit more credibility with consumers.
An assumed name certificate gives you the option to open a business bank account under the assumed name. However, before you rush out with your new assumed name certificate to open a business bank account, you will need to obtain an EIN. An EIN stands for employer identification number that you will have to apply to the IRS to get this number issued to your business name. Another name is also called a Federal employer identification number. Here is another link to more information from the IRS website to help you make a decision on which entity type you want to start up. To apply and obtain an EIN is FREE and takes a few minutes to do online.
An LLC as well as a corporation will need to apply for an EIN as well after their entity name and paperwork has been approved by the State.
What is the need for an EIN number issued from the IRS?
The EIN is normally issued immediately online and then an actual official letter will be mailed to you at the address you provided to the IRS for your business. Be sure to save that email and letter for future use. That document with your EIN issued to you and your business name will be needed while you are in business. This EIN is needed to open a business checking account, business credit card applications, and to apply for a Dun & Bradstreet number, some vendors to establish lines of credit with will want an EIN number. All companies will want to a copy of the letter with the EIN number from the IRS. Be prepared to to give copies of this document as needed when asked.
Sales and Use Tax Certificate
You will need to check with your county that you live in to determine if you need to apply for sales and use certificate for your business name in the industry that you intend to do business in. This certificate is issued to you from the county that you reside in to charge sales tax for your services and remit the sales tax to the State.
The LLC and the corporation will have to apply for a sales and tax certificate number also.
Another option that is better than a DBA is the limited liability company.
Limited Liability Company
A Limited Liability company or LLC is a type of business entity that can be formed through the State you are in or want to do business in. These types of legal entities provide some limited liability protection as a corporation with members that can be managers or just members that don't participate in the business, and easier to run. The fees to form and operate an LLC will cost more than running your business as under a DBA or assumed name certificate. The advantage is that you will have personal protection.
Some entrepreneurs just file their LLC paper work online with their Secretary of State's Office, paid the fees, and they are a legal corporate entity. Some business owners or startups need the assistance of a business attorney to help with their structure and set up of their LLC filings with the State. Really up to you how you want to proceed with your business filings as well as your knowledge and experience in this endeavor. Any time you are not sure how to proceed or confused, seek the advice of an attorney. The information in this article is not meant to be legal advice, but based on experience having set up LLCs personally for myself and shared experiences of business owners that get together to encourage each other as well as share knowledge and skills learned as we each walk through the process of our start up journey.
Once your State has issued the approval of your LLC with an official letter in the mail, then you are official. The next step is to apply for an EIN number which is described under the assumed named certificate or see links below.
An LLC is simple and easy to form and operate.
LLCs have no limit on the number of owners which are called members. The members share responsibility of managing the business. These members also share the predetermined percentage share of the profits and losses of the business. The profits and losses are then filed on the members' tax returns. See CPA advice on this.
Be sure to have a written" Operating Agreement".
The Operating Agreement spells out all of the duties and responsibilities of each member, as well as their named percentage ownership, obligations, and duties. There is much more involved in the operating agreement that would be best to seek the advice of an attorney to draw up this document for your LLC.
Very important to have that operating agreement notarized and in place that is in place, sighed by all members of the LLC or just you the single member manager of the LLC that is notarized. Give each named member that signed the operating agreement a copy of this document and keep with your other business documents. Don't forget to store digital copies on the cloud, your laptop, eternal hard drives, etc.
If you already have a financially viable business operating as in an assumed name certificate or sole proprietor, you should consider researching the advantages of forming an LLC to limit your personal legal liability from your business so that you and your business are separate legal entities and will be treated as such.
Liability Shield For LLCs
This means that you the owner of the LLC can not be held personally liable for the business debts of your business formed as an LLC or any related lawsuits. Your personal assets are shielded such as your car, home, bank accounts, and any other personal assets. The lawsuits would be filed on the LLC as well as any co owners of the LLC, and the registered agent. All LLCs have to have a named registered agent to take service of any lawsuits or notices of the company. The registered agent can be your attorney. Often times, the registered agent is the owner. Any lawsuits filed against the company can be for damages as well as company bank accounts for debts or related issues, and any company assets.
An LLC attached to your business name reassures consumers that you are serious about your business being run professionally, and you intend to stay in business for the long term.
C Corporations
To form a C corporation, the same steps are needed. Choose a name and check availability with your State. File the necessary paperwork with your Secretary of State and pay the fees to incorporate in your State or use an attorney to file your corporation papers for you. Once your business entity is approved, apply for an EIN, and open bank account for your business.
Advantages of a C Corporation
The Corporation also shields the owners and shareholders from personal liability. The corporation is its own separate entity. There is business continuity. Meaning the business can exist long after the shareholders and owners have passed away and still continue in business. Unlimited life span of a corporation.
The corporation pays its own taxes, can own property in the company name, own other companies, enter into contracts, and can sue or be sued.
Can issue multiple classes of stock
Transfer ownership by an assignment or sell
Negatives of C Corporation
Double taxation on corporate earnings.
Follow protocols for the initial and annual task of the meeting of the directors and shareholders
Adopt and maintain by laws of the corporation
Issue shares of stock to owners
Lots of ongoing fees and reporting
Formalities and protocols must be followed
More time and money spent on CPAs, tax accountants, corporate attorneys, tax attorneys, accountants, staff accountants, and HR.
This article only touches on the highlights of each type of business formation. Each person has their own unique situation, so do your research before you choose your entity selection for your business. Consult an attorney is always a good way to get legal advice. Good luck on your journey.
If you are interested in learning more about business entity selection, we shared a 12 minute or so video by Robert Kiyosaki that touches on these decisions that may help you. You can also find the link below.
Our motto on everything we read online is do this: Question everything, analyze it, and always do your own research to reach your own conclusions to "Be In The Know™" Breaie®
Sources:
https://www.breaie.com/videos/best-advice-from-rich-dad-for-entrepreneurs
Thank you Aymane Jdidi for your picture from Pixabay.
