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The Details Behind Starting an LLC For Your Small Business – Part 1

The Details Behind Starting an LLC For Your Small Business – Part 1

By Pat Flynn on

starting-llc-small-business

Did you know that February is National Start a Business Month?

Neither did I.

But, in light of the fact, I decided it might be nice to do a detailed post of some of the benefits behind starting a company and exactly what it entails.

I am a small business owner myself. In fact, I’m the owner of two companies: Flynndustries, which is my company that heads the websites that I create (including this one), and LOLer Apps, which is my iPhone app company. Additionally, I just helped a friend start his own company the other day, so the process is still fresh in my mind. I just wanted to make sure I could share as much as I could remember with you today.

In the past, starting a company was no easy task. Usually involving a lawyer, the process took much longer and was far more expensive. You can still hire a lawyer to setup a business for your today, but luckily for us, there are online services such as LegalZoom that can take care of everything in less than 30 minutes. (Full Disclosure – I make a commission if you buy through this link.)

Before I go on, I must first write this quick disclaimer: I’m not a lawyer or a certified public accountant of any kind. Nothing I say or write should be held against me or my companies, and this information shouldn’t be taken as legal advice. If you’re looking for professional advice, I recommend consulting with a lawyer or CPA on your own.

Thanks!

Why Would You Want to Start Your Own Company in the First Place?

Great question!

There several different reasons why you might want to create your own business entity. For me, starting a business was a dream of mine ever since I was little, so there was some personal fulfillment involved in my decision, among other things.

Here are some other reasons why you may want to start a company:

  • Freedom: Probably the number one reason why people start companies is to break away from the rat race and the 9 to 5 lifestyle. By starting a company, you become your own boss and can finally make your own decisions.
  • Professionalism: In my experience, having my own company has made what I do online seem much more professional. It may not make a difference to you or even my customers, but it definitely makes a difference to other companies that I’ve worked and dealt with. Most established companies are far more comfortable and more willing to work with other companies, instead of just individual people.
  • Protection: Many people start companies for protection against their personal assets. If a company (not a sole proprietorship or general partnership, which I’ll talk about later), get’s sued or finds itself in debt, the owners’ personal assets would not be liable.
  • Tax Advantages: By starting a company, you grant yourself the ability to write off certain business expenses, which can save you a lot of money. As to what exactly you can write off, I recommend discussing this with your CPA / Accountant.

Why Would You NOT Want to Start Your Own Company?

As I always do here on this blog, I try to look at both sides of the equation.

The truth is, starting a business is not for everyone. Some of you may be comfortable in your 9 to 5 jobs, and for others, there are these things to think about:

  • It’s ALL You: As cool as it is to be your own boss, there’s a lot more to think about. Working a 9 to 5 job, you just have to worry only about the job you’re assigned to, and that’s it. As a business owner, you have to worry about every single aspect of the company, including financial, legal and all that jazz. For some, this can be too much.
  • Schedules are virtually non-existent: As much as I don’t like the 9 to 5 lifestyle, at least you know that by 5pm, you’re done. When you’re your own boss, it’s hard to keep steady hours because it just seems like there’s always more you can do to improve the business. It’s hard to turn off that switch, trust me.
  • Benefits: When you start your own company, you don’t automatically have access to a 401k plan, a health or dental insurance plan. You have to figure all of that stuff out on your own, and it sucks! Not only do you see exactly how expensive it is to really get insured (we don’t see really how much our employers are paying for us while at our 9 to 5 jobs), but we get to see exactly how cruddy the whole system is.

That being said, I still don’t ever regret going down the path that I’m on as a small business(es) owner, and if you’re still interested in possibly setting up your own company one day, I invite you to keep reading.

The Different Types of Business Structures

Before you start a business, you must first decide on which type of business structure you would like to form. I’ll briefly summarize the different types for you below, but I definitely recommend reading more about each type here on the IRS website.

Sole Proprietorship

A sole proprietorship is a business that is owned by a single individual, and it’s definitely the easiest and cheapest to create. No paperwork needs to be filed with the state, and all you basically have to do is register for a DBA (which stands for “Doing Business As”) so you can run your business under a name different from your own. (Full Disclosure – I make a commission if you buy through this link.)

Unfortunately, the major downfall of a sole proprietorship is that the business owner is personally liable for any debts that the business incurs. Additionally, it can be very difficult to get funding (loans from banks or investment capital) as a sole proprietor.

General Partnership

A general partnership is basically the same thing as a sole proprietorship, except it involves two or more people. A little bit more work needs to be done as far as dividing who is responsible for what and the percentages of ownership between all of the owners involved, but again – no paperwork needs to be filed with the state.

The scary thing about partnerships is that you are personally liable for any one of your partners’ wrongdoings. If one of your partners decides that it’s a good idea to drink and drive in a company car, if he gets into an accident, you could end up paying for the damages and medical bills that come as a result.

For both sole proprietorships and general partnerships, all income and expenses are simply reported on the individual’s personal tax returns.

Corporations

A corporation is a business entity that is recognized as a totally separate legal entity from its owners. Think of a corporation as a whole different person, with it’s own ability to conduct business, sue or be sued.

Corporations are far more complicated to setup and understand than the previous two business structures. There are shareholders involved, officers, board of directors, etc., most of which is stuff I honestly don’t know much about. There are “C” corporations, “S” corporations, Professional Corporations, and non-Profit corporations to consider, not to mention all of the paperwork that is required.

The primary advantage, again, is the limited liability that the corporation grants it’s members and shareholders. Additionally, a corporation can implement benefit and profit sharing programs for it’s employees.

Lastly, because it is a separate legal entity, it’s taxed as a separate entity as well, which can make things a bit complicated for those of us who are just starting out or doing small time business online.

Limited Liability Company (LLC)

The LLC is a fairly new type of business structure that takes the best of each of the above.

An LLC is not a corporation, but it can still provide that corporate-like protection that is important for many business owners. Also, an LLC can elect to be taxed as a Sole Proprietorship, Partnership, S Corporation or C Corporation, and income and expenses can simply be passed through to the members’ individual tax returns.

All of my companies are LLCs, and there is very little as far as extra paperwork that needs to be done. I’m quite happy with my decision to go with an LLC, however there are a few things to consider:

  • Because the LLC is so new, some states may not view a LLC as a separate entity and may end up treating it more like a sole proprietorship or partnership, which defeats the whole purpose of having an LLC in the first place. An owner of an LLC should do everything in his/her power to separate business from personal, especially when it comes to finances, in order to keep that separation and protection as best as possible.
  • Many states require a franchise tax in order to have an LLC. This tax is essentially the “fee” the LLC pays for the benefit of limited liability. In California, for example, I owe $800 per LLC each year, and this doesn’t include any taxation on my income.
  • Lastly, many investors still have mixed feelings about LLCs, so it may prove to be more difficult to raise any capital investments for your business if you have an LLC. That being said, since we work online, not very much money is needed to do what you want to do. I started my LEED exam website for less than $8 a month (domain and hosting).

Since this post is much longer than I had oroginally anticipated, I’ll be finishing up the details about starting an LLC in my next post. In it, I’ll go over, in detail, the process of setting up an LLC, including what you need to know before you begin, how much it will cost you, and what to expect after you setup your business.

Are any of you thinking about starting your own legal business entities, or have you already? What was your experience like when setting it up, and are you glad you did what you did?

I’d love to hear from you. Cheers!

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