Amy Will - Launching & Building a Brand For Dummies

In the following sections, I weigh the pros and cons of each type of business entity.

A sole proprietorship is the fastest, easiest, and cheapest business structure to set up, requiring no time, effort, or money. You just start doing business, and your business is considered to be a sole proprietorship. With a sole proprietorship, you have complete control of all business decisions, and you report your income (and are taxed) as an individual taxpayer. Those are the benefits. These are the potential drawbacks:

Unlimited personal liability: This one’s the biggie. Nothing separates you from your business, so you’re personally responsible whenever something bad happens. If your business fails or someone wins a lawsuit against your business, you can lose everything, including your home and personal possessions.

Difficulty raising money to grow your business: You can’t sell stock in the business, and banks will be reluctant to loan you money.

Increased burden of running the business: With total control comes total responsibility, which can leave you feeling the heat when problems arise.

As a sole proprietor, you’re not required to name the business after yourself. You can register your business under a doing business as (DBA) name. As a DBA, you gain no legal protection, but you appear to the world to be more of a business entity. See “ Registering your business” later in this chapter for details.

However your business is structured, I encourage you to apply for an employer identification number (EIN). If you have employees, you must have an EIN to report and deposit employee payroll taxes. You don’t need to be an employer or corporation to obtain and use an EIN, however. You can use an EIN instead of your Social Security number when invoicing clients and customers and paying taxes, which can help protect you from identity theft. Some businesses may also feel more comfortable doing business with you if you have an EIN because it establishes you as a business owner instead of an employee. To apply for an EIN, visit https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online .

If you co-own a business, consider forming a partnership. With a partnership, profits and losses pass through to the personal tax returns of the partners (so the partnership itself isn’t taxed). When forming a partnership, you have two options:

Limited partnership (LP) has one general partner with unlimited liability, who has more control in the business and must pay self-employment tax, and one or more partners with limited liability and control, who aren’t required to pay self-employment tax, as specified in the partnership agreement.

Limited liability partnership (LLP) is similar to an LP but provides limited liability to all partners.

An LLC offers two key benefits:

Protection against personal liability that would otherwise expose your personal assets to risk.

Pass-through of profits and losses to your personal income tax return so that the LLC itself isn’t subject to corporate taxes. Members of an LLC, however, like sole proprietors, are considered to be self-employed and are subject to self-employment taxes (Social Security and Medicare).

If you have significant personal assets and are doing any risky business (anything that could expose you to costly lawsuits or bankruptcy), I encourage you to do business as an LLC or as an S or C corporation, which are covered next.

A C corporation ( C corp for short) is separate from the owners and operators of the business and is subject to corporate taxes. Corporate taxation is a form of double taxation; your corporation pays taxes on its profit, and then you pay taxes on capital gains paid to you as a shareholder of the corporation. A C corp provides the strongest protections against the loss of an owner’s personal assets in the event of bankruptcy or lawsuits.

One of the big benefits of a C corp is that it can raise funds by selling shares to investors. The big drawbacks are the costs and complexity of forming and managing a C corp. Although this option can be the best choice for large organizations, smaller organizations will probably want to steer clear of it.

An S corporation ( S corp for short) is a simplified version of a C corp with lower costs to set up and manage. As such, it’s more attractive to smaller organizations. With an S corp, profits pass through the corporation to the owners, so it’s not susceptible to double taxation.

Another key benefit is that as an owner, you can receive money from the corporation as employee pay or as dividends paid to investors. The money you take out in pay is subject to income tax and self-employment tax, whereas the money you receive in distributions is taxed at capital-gains rates (typically lower than income tax rates) and isn’t subject to self-employment tax.

One important disadvantage of an S corp, compared with a C corp, is that an S corp can sell only up to 100 shares, which limits its ability to raise capital for growth by selling shares to investors.

Registering a business simply means establishing it as a bona fide entity with state and local licensing and taxing authorities. If you’re creating a personal brand as a sole proprietorship, registering may not be necessary (depending on the jurisdiction and nature of your business), but if you’re operating as a corporation, your business must be registered.

Check with your state, county, and municipal government organizations or a local branch of the U.S. Small Business Association (SBA) to find out what you need to do in terms of registration and license for the type of business you’re starting.

When you form a corporation or LLC, you choose a business name other than your name as part of the process. If you’re operating your business as a sole proprietorship, you have the option of using your name as the business name or choosing a DBA name.

A DBA doesn’t confer any legal protections, but it enables you to operate under an assumed name, which may be advantageous for branding purposes. Another benefit is that when you have both a DBA and EIN, most banks will allow you to open a separate business bank account and are more likely to consider lending you money for your business.

Depending on the state or locale in which you do business, you may need to register your DBA with the secretary of state or another state agency. Alternatively, you may need to register with the county or municipality where you do business.

If you operate as a sole proprietorship, you’ll use your Social Security number to pay federal, state, and local taxes. If you form a corporation or create a DBA, you register your business under a separate name and can then apply for an EIN to use when you pay your taxes or withhold and pay taxes for employees.