Making a business is hard but read on and approach it confidently by self educating yourself and reviewing all options.
Many people often talk about what businesses they wish to open and the dream is usually a vision of the successful end result. Several have written some goals down on how to accomplish opening that first business but the next step of actually rolling out a plan and executing it is what gives people cold feet.
Forming the actual business into an LLC, sole proprietorship, or corporation and branding your business is what must be done to proceed with confidence.
Educating yourself and making the right selection when forming your business entity is a vital step to getting your business on the right path to success.
You can have all the ideas in the world but if we don’t take the initiative to take action you will surely stay in the idea phase.
Avoiding that can be extremely simple but make sure you start off with a well researched idea that is ready to be brought to life.
Here are three key things to research before forming your business:
Who is your target market and audience?
Who is considered your competition?
Have you fully researched the market to understand the risk?
Now that you have solidified your business idea make sure you know that you are stepping foot into uncharted territory and failure can be inevitable.
Entrepreneurship is rocky and not for the weak, you can fail many times before you strike that one business that you nurse until it finally turns a profit.
The quicker you realize this the better you will be able to adapt to the gains and losses of entrepreneurship.
It is one big roller coaster ride of a journey but reap what you sow and you will have created something you can be so proud of!
When building the foundation to a successful business you must be prepared to learn to survive in a forever changing environment. I cannot stress enough that you must constantly self educate to keep up with your market.
Talking to an entrepreneur or small business owner before opening your business can also help you better understand that owning a business requires a lot of hard work and non stop dedication. An idea will never come to life without effort but if your willing to put the work in you will be introduced to a whole new type of freedom and reward.
Logo creation and naming your business are important steps when getting established but what about the several steps in between?
Forming your business structure is one of those steps that should not be taken lightly.
Below are some suggestions to help you turn your idea into a legal entity.
Determining which legal business structure to file for your company must be completed BEFORE registering your company. The business structure you choose will effect how you file taxes and how protected your assets are from debts and if a legal issue arises.
Sole Proprietorship is suggested for people who wish to take on full responsibility for the finances and legal obligations of the business entirely.
Meaning that this route can directly effect your personal credit and there will be no legal distinction or separate existence between the owner and the business entity. You can register as a sole proprietor for enhanced credibility and because it is one of the easiest businesses to set up. Unlike the LLC or corporations you do not need to register with the state.
The individual that registers as a sole proprietor is responsible to report all profits and losses on their personal 1040 income tax return utilizing a schedule C which will be filed annually to the IRS.
The owner can operate as an independent contractor, small business, or franchise owner, and file a fictitious firm name when choosing a name other then the owners to do business under.
The name then becomes a trade name that is used under the owners name and does not create a separate entity. This simple structure is often chosen by millions for its low cost and easy set up.
Many entrepreneurs will choose this route when first starting out and then graduate to a more complex business structure as the business foundation solidifies.
In order to be a sole proprietor, you do not have to take any formal or legal steps at the federal, state, or local level in most cases but be sure to do your own due diligence.
As long as you are the only owner, you automatically become a sole proprietor by conducting business and filing your taxes correctly at the end of the year.
However depending on your circumstances and city guidelines you may need to register your business and obtain additional permits or licenses before conducting business.
You are in control of your own destiny make sure you clearly understand your options before making your decision.
If you want to enable yourself to gain important legal protection for your personal assets, without disturbing the management and income flow of your business look into registering your business as an LLC.
If being a sole proprietor didn’t quite cover what you are expecting in your business and you plan to grow exponentially then an LLC might be the better way to go.
I personally don’t want to be held liable for any and all business related obligations so I highly recommend considering the next option on our list which is filing your business as an LLC.
The most obvious advantage to form your business entity as a limited liability company is so you can protect your personal assets from the business itself.
This will protect against debts, claims, and lawsuits if they happen to arise.
Running a business is full of unknowns so it’s better to be safe and protected ahead of time as you form and create your future business.
Under an LLC you have tax flexibility and can choose and change the way you are taxed which can be very appealing to small business owners.
LLCs can choose to be taxed like sole proprietorships, partnerships or corporations. But it’s important to understand the differences between them because the way your business is taxed can affect both your total tax bill and your obligation to pay self employment tax.
If you only have one owner you will be classified and file your taxes as if you are a sole proprietor but will retain all the advantages and protection of an LLC and is referred to as a disregarded entity for tax purposes.
Your income and expenses will continue to be reported on your individual 1040 income tax return utilizing a Schedule C.
If you have more then one managing member you will be taxed as a partnership and the income will flow through to the members themselves. Meaning you will report your profits and losses on your personal tax returns. Specifically, an LLC that’s taxed like a partnership also needs to file Form 1065, an informational tax return that reports all of the partnership’s income and expenses.
The partnership LLC also issues a Schedule K-1 to each LLC member, showing the member’s share of the LLC’s profit.
Your LLC’s operating agreement should list each member’s percentage share of the LLC’s profits and losses. LLC members then report their share of profit or loss on Schedule E of their personal tax returns. The members of LLCs taxed as sole proprietorships or partnerships are considered to be self-employed for federal tax purposes.
A great benefit of having “LLC” or “Limited Liability Company” in your business name can make your business seem somehow more official. It implies that the business is registered with the state and is somehow more substantial as a legal entity.
This is proved great for business reputation, growth, and recognition.
LLCs are great for small businesses because they can adapt to all situations.
No matter whether you have 100 silent investors or are a two person small business operation. The LLC is flexible making it so you can pretty much write the operating agreement to suit your needs.
You can make your own rules and tailor your entity to suit the intricacies of your business.
When you first go into business, chances are your company won’t be profitable right away.
Building up a business takes time, and in the first year, it’s possible to incur thousands of dollars in losses also known as your start up costs, so if you are eager to soften the financial blow of the startup phase, decide to form an LLC.
With an LLC and its default partnership taxation, the losses of the business flow through to the members so that they can use them as deductions when filing taxes.
This can be a major win for an entrepreneur because it offsets the owner’s other nonbusiness income and can also be used to put you in a lower tax bracket.
I recommend choosing one of the options above, but if you wanted to further explore incorporating your business you would prepare and file a document called Articles of Incorporation and also file registration documents with your state.
I don’t recommend going this route because of how much you need to do to maintain your corporation status.
Corporations are required to issue stock, adopt by laws, hold annual director and shareholder meetings, keep minutes of meetings, issue written corporate resolutions for significant decisions, and file annual reports to the state government and pay annual fees.
Failure to do these things can result in the loss of personal liability protection and dissolution of the corporation.
All corporations begin as C corporations. A C corporation may be converted to an S corporation by filing IRS Form 2553 and electing to become an S Corp.
Talk about complicating but if I were to choose one it would be an S Corp.
For tax purposes C corporation profits are taxed, and are reported on the corporation tax return. Any after tax profits distributed to shareholders as dividends are taxed again, and are reported by the shareholders on their personal tax returns. This “double taxation” can be avoided by electing S corp status for your corporation.
An S corp is treated similar to a sole proprietorship or a partnership. Meaning the profits or losses are passed through the S corp then to the shareholders and are only taxed to the shareholders and reported on their personal tax returns.
If this seems like the way to go make sure you consult an accountant and business’s attorney to really weigh the pros and cons of both S Corp and C Corp and to make sure you set up your entity correctly.
If you got this far you should now be fully aware of which business structure will fit your needs. When making your decision don’t be overwhelmed just take it step by step while taking action. You are in charge of the success of your new business proceed with caution but also be confident in the choice you make!
Your ambition and consistency will carry you far and will help grow your business indefinitely!