Deciding on a legal structure for your business is a critical first step. Here are the most common structures and some details about each to help you decide.
1. Sole Proprietorship:
A sole proprietorship is, essentially, a one-person operation without any formal structure. You may have a sole proprietorship without even knowing it. For example, if you are a musician that plays gigs on the weekends or a nature photographer that sells your photos at local festivals you are likely considered a sole proprietor. However, you are not exempt from carrying the necessary local business licenses or paying taxes on your income. You are also personally responsible for paying any debts of the business. For example, if you were to lose a lawsuit or fail to pay a vendor, that person could come after your home, your car, and your valuables. Finally, if you operate under a name like “Bob’s Band” you must register the name of your business with the state.
2. Limited Liability Company (“LLC”):
A LLC offers protection for your personal assets because it shields you from personal liability for business debts. However, there are certain formalities that you must comply with, so speak with an attorney about how to make sure you are protected. Also, not all liability can be avoided with a LLC – for example, if you personally injury someone or personally guarantee a bank loan, you are still personally liable. Your taxes are reported just like they are for a sole proprietorship (but you can make different elections). Running a LLC is easy and does not have many of the formalities that operating a corporation requires. LLCs are a great option for small, family operated businesses or partners.