Business Attorney Tips on Creating a Business Entity

One of the biggest areas of confusion for new business owners is whether a business entity needs to be created, and if so, which type? Often times virtual business owners set up shop from their laptop, in their sweats, and start working with clients before they know it. Even though your online business might feel more casual than a typical brick-and-mortar store, you still have the same business liabilities and considerations to think about. Confused about WHAT they are, and which business entity (if any) you should create?

Here are your hot tips for starting a business, and what it actually means:

1. I’m just starting out and have not registered as any business entity…is that okay?

Most likely yes! If you are currently doing business under your legal name, and have not registered or set up a business entity (such as an LLC or Corporation), you are operating as a Sole Proprietor. This is not a separate legal entity, and is sort of the “default” for anyone running a business that has not created another entity. If you are a sole proprietor, you will include all business revenue and expenses with your personal taxes, but should still have a separate bank account where you keep all money from your business. In terms of legal liability, since you are not creating a separate legal entity, you are still exposed to personal liability for anything you do within your business – so there is no separation there. However, if you’re just starting out, or aren’t taking on any risky or large contracts, this can be completely fine.

IF you are operating a business under a name that is anything other than your legal name, you need to file what’s called a “DBA” which just stands for “doing business as” within your county. Most county clerk websites will have clear instructions on how to file the DBA, and you’ll pay a small fee. Once that’s done, you will officially have your DBA, and you will be operating as

[YOUR NAME], doing business as [YOUR BUSINESS NAME]

Which is how you will want to enter into all contracts, and how you will want to list your business on all your legal documents.

2. What does creating an LLC do?

Chances are you’ve probably been told by someone – whether another entrepreneur, a relative, etc. that you NEED to set up an LLC in order to run a business. While this is not true (you can certainly operate as a Sole Proprietor) there are definitely some advantages to creating a Limited Liability Company, or LLC, if that’s something that works for you and your business.

When you set up an LLC in your state, you are creating a separate legal entity, which means you are telling the world that your business operates separately from you personally. To do this right, make SURE you are completing all documents correctly and accurately. In most states, this will include (1) filing your Articles of Organization with the state, (2) choosing a registered agent, (3) File a Statement of Information with the state, and (4) create an Operating Agreement – this is not mandatory, but highly encouraged!

Once you’re set up, you’ll want to make sure you are prepared to pay any annual tax fees associated with the LLC. In California, for example, there’s a minimum franchise tax fee of $800 that must be paid annually.

One of the main perks of an LLC is that, by creating this separate legal entity, you typically shield yourself from any personal liability for any issues that arise in your business. BUT – in order for this to be true, you need to also remember to treat your LLC as a separate entity from your personal assets and life. This means, separate bank accounts, separate credit cards, separate everything – NO mixing funds, expenses, income, revenues, etc. Treat the LLC as a completely separate thing, with no personal overlap.

3. Why Does Everyone Tell me I Need an LLC?

There is a lot of confusion around different business entity types. Because a Limited Liability Company (LLC) is the most common, and the one people most often see others creating, it’s the one most people have heard of. Plus, many people don’t know what a Sole Proprietorship is, and that they’re actually operating as one of these if they have not created a business entity. If you are starting a business, your quick cheat sheet to business entities (within the United States) will look something like this:

WHAT YOU’RE DOING	BUSINESS ENTITY YOU SHOULD CONSIDER
Operating a business under my legal name, e.g. “Christy Westerfeld”	Sole Proprietorship
Operating a business under something other than my legal name, such as “Your Best You Coaching”	Sole Proprietor, but need to file DBA for the business name.
Want to create a separate business entity, but want it as simple as possible	Create a Limited Liability Company (LLC) in your state, ideally with a local attorney’s help
Want to create a business entity, might have multiple owners, investors, or other factors to consider	Could be an LLC, but may want to consider a Corporation as well.

 

4. WTF is an S-Corporation and why do I keep hearing about it?

This is a confusing topic, because people tend to throw around the term “S-Corp” a lot, and may not actually know what it means. In short, designating your business as an “S-Corporation” instead of a “C-Corporation” (or filing an LLC but electing to be taxed as an S-Corporation) allows you to be taxed differently within your state, which may end up saving you money. However, this highly depends on what state you’re in, your business revenue, employees, and a lot of other factors. If you’re wondering if this model might be right for you, definitely ask your accountant and a local business attorney to weigh in on both the tax and legal implications of this.

5. Does Creating an LLC Protect My Business Name?

This is another HUGELY important thing that most people misunderstand. NO. Registering your business within your state will most likely prevent another person from registering the same business name in the same state. BUT – the registration is completely separate from protecting your business name through trademark law, with the United States Patent & Trademark Office. So if you want to protect your business name, you should definitely look into hiring an attorney to file the appropriate trademark(s) for you, to ensure your business name (and logo!) are protected. More trademark questions?? Make sure you check out my article where we talked ALL things trademark basics HERE.

Overall, creating a business entity (or not creating one) is something that confuses a lot of new business owners. The bottom line? Make sure you understand what you’re currently operating as – whether that’s a sole proprietor, LLC, or something else. If you haven’t yet registered any kind of business, but you know you want to, check in with an attorney and accountant in your state, to make sure you’re picking the one that works for you, your revenue, your business goals, and what is most advantageous in your state.

Setting this up now could save you a LOT of money down the road, Babe. It’s worth it!