A guide for choosing the right type of entity for your new business.
It's easy to think that bigger is better; if we're not trying to build the next Google, then we're not ambitious enough. That's a lie, and if you feel that your company's size defines success, please stop and consider that.
The right size company is the company that works for you. We mean in two ways, first, it needs to be the size that fits you, your life, and your vision. But we also mean that it needs to work for you, instead of you working for it. There's no sense in creating a business if it's going to feel like a job you don't want. We all have different giftings, so take a second and think about what size you want your business to be. Your answer is going to dictate what kind of entity you should choose.
This guide is not meant to be comprehensive, and each state is a little bit different in how it handles setting up a new business entity. Our goal here is to help you understand the basic classification types and help you understand which one is going to be best for you.
Legal Disclaimer: If you have any questions, we highly recommend that you consult with an attorney about the specific entity that is best for your business. We are not offering legal or tax advice for your business.
You can always change the structure of your business, later on, so don't be afraid of getting it wrong. However, if you plan to raise outside capital, getting it right at the beginning becomes a bit more important. For instance, you can't raise money from a venture capital fund When you're set up as a sole proprietorship.
If you're planning on being a one-man band, then this could be a great option for you. The benefit of a sole proprietorship is that it's very easy to set up, and it doesn't require any additional work when it comes to filing your taxes. The downside to a Sole proprietorship is that it offers you no legal protection if your business is sued. That means that the business is viewed as the same entity as you. So if the business is sued, your personal assets are not safe. So to be clear, if you set up a sole proprietorship, you do not have this protection that comes with setting up a separate entity. Does your business need a legal wall protecting your personal assets? We think it's always a good idea.
This is a very popular type of legal entity because it's much cheaper to form and easier to run. An LLC is a great fit for a broad range of businesses. The best thing about an LLC is that it offers you some liability protection without a significant additional burden when it comes to filing taxes. An LLC also does not require you to have officers and directors or a board with shareholder meetings and some of the other responsibilities that come with having a corporation. For most businesses, an LLC is going to be the perfect solution.
An LLC can have multiple owners, and it provides flexibility for you to choose how you want to be taxed. It's important to note that your business entity structure is a state-level classification but how your are federally taxed is optional. In other words, for some businesses, you can be an LLC but be taxed as a corporation.
In some states, a single-owner LLC can be treated as what's called "a disregarded entity". This means that when it comes to filing taxes, it's the same as a sole proprietorship. But in theory, you still have the legal protection of an LLC. We say "in theory" because if you were to be sued or file bankruptcy and go to court, then you could lose some of the legal protection the LLC provides. This would happen if it's discovered that you have treated business funds as personal funds. So the important thing here is to ensure that you keep business funds separate from your personal funds.
Most venture capitalists will only invest in corporations. For this reason if you plan to seek outside investment, LLC is probably not the right fit for you.
Corporations are also called C-corporations; they are a business entity designed to separate the company's owners from the entity itself. In C-corps, owners are called shareholders. Corporations pay their own taxes and have the ability to buy property and enter into contracts. Owners of a C-corporation only pay taxes when they receive dividends from the corporation.
S-corporations combine some of the elements of an LLC and a C corporation. An S corporation is still a separate legal entity, and it does protect the owners by limiting their liability for the business's debt and other legal obligations. In an S-corporation, the shareholders are responsible for paying taxes, similarly to how it works in an LLC.
If you're trying to build the next Facebook or Microsoft, you should set yourself up as a C-corporation. Another thing to consider when setting up a corporation is which state you want to be incorporated in. Delaware is the most Popular state to set up a corporation it. So if you're trying to build a $1 billion tech company, you should start by incorporating as a C Corp. in Delaware.
If you are serious about setting up a corporation and aren't sure if Delaware is right for you, then it's worth looking into the advantages and disadvantages of setting up a corporation in your state. It's always important to consult legal counsel with any questions you have before you set up your corporation. Check out our other resources to learn about setting up partnerships and creating your articles of incorporation.
Below are some helpful links for further information and a guide to finding your state's specific entity filing process.
https://www.nolo.com/legal-encyclopedia/llc-corporations-partnerships
https://www.nolo.com/legal-encyclopedia/corporations-vs-llcs-29025.html
A guide for choosing the right type of entity for your new business.
It's easy to think that bigger is better; if we're not trying to build the next Google, then we're not ambitious enough. That's a lie, and if you feel that your company's size defines success, please stop and consider that.
The right size company is the company that works for you. We mean in two ways, first, it needs to be the size that fits you, your life, and your vision. But we also mean that it needs to work for you, instead of you working for it. There's no sense in creating a business if it's going to feel like a job you don't want. We all have different giftings, so take a second and think about what size you want your business to be. Your answer is going to dictate what kind of entity you should choose.
This guide is not meant to be comprehensive, and each state is a little bit different in how it handles setting up a new business entity. Our goal here is to help you understand the basic classification types and help you understand which one is going to be best for you.
Legal Disclaimer: If you have any questions, we highly recommend that you consult with an attorney about the specific entity that is best for your business. We are not offering legal or tax advice for your business.
You can always change the structure of your business, later on, so don't be afraid of getting it wrong. However, if you plan to raise outside capital, getting it right at the beginning becomes a bit more important. For instance, you can't raise money from a venture capital fund When you're set up as a sole proprietorship.
If you're planning on being a one-man band, then this could be a great option for you. The benefit of a sole proprietorship is that it's very easy to set up, and it doesn't require any additional work when it comes to filing your taxes. The downside to a Sole proprietorship is that it offers you no legal protection if your business is sued. That means that the business is viewed as the same entity as you. So if the business is sued, your personal assets are not safe. So to be clear, if you set up a sole proprietorship, you do not have this protection that comes with setting up a separate entity. Does your business need a legal wall protecting your personal assets? We think it's always a good idea.
This is a very popular type of legal entity because it's much cheaper to form and easier to run. An LLC is a great fit for a broad range of businesses. The best thing about an LLC is that it offers you some liability protection without a significant additional burden when it comes to filing taxes. An LLC also does not require you to have officers and directors or a board with shareholder meetings and some of the other responsibilities that come with having a corporation. For most businesses, an LLC is going to be the perfect solution.
An LLC can have multiple owners, and it provides flexibility for you to choose how you want to be taxed. It's important to note that your business entity structure is a state-level classification but how your are federally taxed is optional. In other words, for some businesses, you can be an LLC but be taxed as a corporation.
In some states, a single-owner LLC can be treated as what's called "a disregarded entity". This means that when it comes to filing taxes, it's the same as a sole proprietorship. But in theory, you still have the legal protection of an LLC. We say "in theory" because if you were to be sued or file bankruptcy and go to court, then you could lose some of the legal protection the LLC provides. This would happen if it's discovered that you have treated business funds as personal funds. So the important thing here is to ensure that you keep business funds separate from your personal funds.
Most venture capitalists will only invest in corporations. For this reason if you plan to seek outside investment, LLC is probably not the right fit for you.
Corporations are also called C-corporations; they are a business entity designed to separate the company's owners from the entity itself. In C-corps, owners are called shareholders. Corporations pay their own taxes and have the ability to buy property and enter into contracts. Owners of a C-corporation only pay taxes when they receive dividends from the corporation.
S-corporations combine some of the elements of an LLC and a C corporation. An S corporation is still a separate legal entity, and it does protect the owners by limiting their liability for the business's debt and other legal obligations. In an S-corporation, the shareholders are responsible for paying taxes, similarly to how it works in an LLC.
If you're trying to build the next Facebook or Microsoft, you should set yourself up as a C-corporation. Another thing to consider when setting up a corporation is which state you want to be incorporated in. Delaware is the most Popular state to set up a corporation it. So if you're trying to build a $1 billion tech company, you should start by incorporating as a C Corp. in Delaware.
If you are serious about setting up a corporation and aren't sure if Delaware is right for you, then it's worth looking into the advantages and disadvantages of setting up a corporation in your state. It's always important to consult legal counsel with any questions you have before you set up your corporation. Check out our other resources to learn about setting up partnerships and creating your articles of incorporation.
Below are some helpful links for further information and a guide to finding your state's specific entity filing process.
https://www.nolo.com/legal-encyclopedia/llc-corporations-partnerships
https://www.nolo.com/legal-encyclopedia/corporations-vs-llcs-29025.html
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