Which Business Entity is Right for Me?

Hey there! So you’re starting a business, that’s so exciting! Or maybe you already have one? That’s even better! Bravo!

But before we go too far, did you form a business entity? Like a Sole Proprietorship, an LLC, partnership, or corporation? If you didn’t quite get to that yet. We can get you sorted out STAT.

You probably already know why you need to form a business entity but because I like to make business legal info super clear, let me take a minute to explain.

Creating a business entity, like an LLC or corporation, provides a legal shield between your personal assets and your business's liabilities. If something goes wrong, your personal stuff (like your car or savings) stays safe. Now, a business entity isn’t a magic wand, you can’t just register as an LLC and *poof* you’re untouchable. You actually have to act like your personal assets are separate from your business. A super important step is to separate your finances. For more on that, check out my article on how to get an EIN number and open a business bank account.

But once you do that, having a business entity will make it easier to get loans, permits, grants, or credit. Lenders often consider formalized business entities to be more credible.

Plus depending on which business entity you choose, you might be looking at some sweet tax savings.

And while your business is fresh and new, someday you will probably want to retire, a business entity lets your business live on even when you’ve moved on. Or if you ever want to cash in on your hard work and sell, a business that is a registered legal entity can be sold or transferred.

Another reason to formally set up your business? It lets you hire help. So when you’re done being Gal Friday and ready to step into your inner CEO, you need to have a formal business structure in place.

Hopefully, you are seeing the many upsides of taking a beat and making your biz official. The good news is, it’s not hard to do! I have a simple sanity-saving guide below. But first, you’re going to need to decide what kind of business entity is right for you and your business. I’ll give you a quick play-by-play on the most common options in the US.

1. Sole Proprietorship - "The One-Woman Show" 💼

Imagine you're a solo superstar running the show. This is a no-fuss setup where you and your business are pretty much one and the same. You're the captain of the ship, making decisions and taking credit (and responsibility!) for everything. If you go this route, there are few necessary legal formalities and all the profits are yours with no partners or shareholders to claim them. Plus your taxes may be easier because you can often file business and personal income together. There is less paperwork involved and you can just get down to business. Just remember, what you gain in simplicity, you might miss out on in legal protection. In the case of a sole proprietorship, your personal assets (house, car, etc) are all at risk because there is no legal separation between you and your biz. It can also be much harder to secure financing or to expand beyond your personal capacity. Sole proprietorships are simple but I do not personally recommend them for most businesses because they are too risky.

2. Partnership - "Two's Company" 🤝

Picture a dynamic duo tackling business together. Partnerships involve two or more people joining forces to create a business. It's like a friendship with a business twist. You share profits, responsibilities, and hopefully, plenty of high-fives! It can be wonderful to have someone to collaborate with and to complement your skillset. Partnerships help mitigate risk because you share it with your partner but, in most cases, one partner can still be held completely liable even for actions of the other partner. You will definitely want a partnership agreement, if you go this route, to make sure you have a clear path of who is in charge of what and how you will handle disagreements, deaths - sorry to get morbid, or dissolutions. Before you decide on a partnership, make sure your business buddy is someone that you trust, have crystal clear communication with, and enjoy working with.

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**3. Limited Liability Company (LLC) - "The Flexible Ninja" 🥋

An LLC is like a chameleon – it combines the best of both worlds. It offers the protection of a corporation and the flexibility of a partnership. Your personal assets are safe if things go south, and you can still have a significant say in how things are run. It's like having your cake and eating it too! As the name suggests, an LLC with limit your personal liability if things go south. With an LLC your personal assets are separate from your business, as long as you act like it and keep your finances tidy, which means your house and car are safe from any business lawsuits. Often you get the advantage of pass-through taxation which allows you to report your business profits and losses on your personal tax return but be sure to check with your accountant on the best approach for your biz and to make sure your self-employment taxes are covered. Plus, you can choose to have a one-person LLC or to invite other members on board with a multi-member LLC so it really is a flexible option. A minor con to all that flexibility is that LLCs vary by state so not every state will offer the same set-up process or protections. Even so, the LLC is my go-to for almost every new business.

**4. Corporation - "The Big Player" 🏢

Here comes the big shot on the block! Corporations are like the celebrities of the business world. They have their own identity, can sell shares, and exist independently of their owners. It's like your business has put on a suit and tie and is ready to conquer the stock market. Corporations often enjoy significant taxes benefits and also offer limited liability to their owners. However, they are far more complex to establish and maintain legally because they are highly regulated, so they are not my favorite for new business owners.

**5. Nonprofit Organization - "The Heartwarming Hero" ❤️

Nonprofits are the champions of making positive change. They focus on social, educational, or charitable goals. While they're not in it for the profits, they're still serious about making a difference. Think of them as the business superheroes of the world! Nonprofits are typically tax-exempt and can often take advantage of a variety of grants and funding sources like tax-deductible donations. You will also get the benefit of wisdom from your governance board. However, your income-generating activities will be limited and regulatory oversight requires administrative legwork to maintain your tax-exempt status. Nonprofits are amazing but I’m guessing this entity is probably not the right fit for your business.

Remember, each entity has its perks and quirks. Just like picking the right outfit for the occasion, choosing the right business entity sets the stage for your journey. But, if you are like the majority of small businesses, an LLC may be the Cinderella-slipper-best fit for you.

You have got what it takes to set up your LLC and I’m going to make it as straightforward, easy button, as I can. But you should definitely visit your state business regulatory website because LLCs do vary state-to-state.

First, you need to choose a business name.

You’ll want to come up with something unique, yup, that’s a smidge hypocritical coming from someone who named her biz after herself. But, you will also want to make sure your name complies with your state’s naming conventions and regulations. Most states have an easy-to-search database to help you make sure that your chosen name is available. And, yes, you will want to include either “Limited Liability Company” or “LLC” as part of your name.

Second, you will be asked to choose a registered agent to receive documents and legal notifications on your business’s behalf.

This can be an individual or you can hire a professional service. In most cases, this will be you at least while you are building your business.

Third, you will need to file your Articles of Organization with your Secretary of State’s Office.

This can sound intimidating but typically this is just information about your business and in many cases, your state’s website likely has an easy form to upload - no running to the post office required. The minimum information that you will need to have on hand for your AoO is your company name, business purpose, duration, business address, management structure, ownership, registered agent, and effective date for your LLC.

Fourth, you will need to create an operating agreement that outlines how your LLC will be managed, the role of different members, and how decisions will be made.

I can help you get started with Solo or Multi-Member LLC template in my template shop. Keep in mind that if you do not have your own operating agreement, your state is likely to apply default rules to your business that you will be responsible for following.

Now you might be done at step 4, and if so, hurray! But in most cases, you will want to continue right on and apply for your business EIN number. I have a whole article about why this is a smart move and how to do it lickety-split.

So, step five, is to apply for EIN or Employer Identification Number, especially if you want to open a business bank account (you definitely do!) or if you plan to hire any employees.

Your state website likely has the link for this on the same page where you found the info about setting up your LLC.

Sixth, file any additional necessary state forms.

Depending on where you live and operate your business you may have additional forms or fees to pay. In most states, the fees range from $50-$200 so be wary of any services that are looking to charge you an arm and a leg to file an LLC for you. It shouldn’t cost that much and you can definitely DIY it with a little research.

A seventh and final step is that you may, depending on your state, be required to public notice in a local newspaper.

Your state’s business website will make it clear if this is required where you register.

After that, it’s time to celebrate! You’ll be the proud owner of an LLC and well on your way to leveling up your business’s legal status. Now, remember, and I cannot stress this enough, you will only benefit from the limited liability provided to an LLC if you maintain actual separation between you and your business. That means you can’t intermingle your assets and you need to behave like a professional. Getting a business bank account and separating your finances ASAP is a super crucial first step. So take a minute to toast your new LLC and then get your business a bank account - it will only take a few minutes and then you can sleep easy knowing you are legally protected.

THIS ARTICLE IS NOT A SUBSTITUTE FOR LEGAL ADVICE AND IS OFFERED FOR INFORMATIONAL PURPOSES ONLY. EVERY SITUATION IS UNIQUE AND YOU SHOULD CONSULT A LOCAL ATTORNEY FOR ADVICE ON YOUR PARTICULAR CIRCUMSTANCES.