How to choose the right business entity – Should I open an LLC ??

Deciding how to choose the right business entity can be a daunting task. I will try to clear it up for you and give you some easy solutions.

Starting a New Business? / Sole Proprietor, Partnership or LLC

A sole proprietorship is the most common type of business entity. It is also the most basic. Under a sole proprietorship the owner is responsible for EVERYTHING.

If you take on debt you are personally responsible for paying it back. If something happens legally and you don’t have insurance to cover it. You are responsible for anything that happens while in business.

For taxes any income after expenses that is made with a sole proprietorship is taxed as personal income.

Sole Proprietor Pros

  • A sole proprietor has control over the business.
  • A sale or transfer can take place at the discretion of the owner.
  • No extra corporate taxes.
  • Minimum legal costs to form compared to a corporation.
  • Few formal business requirements.

Sole Proprietor Cons

  • The owner can be personally liable for the debts and obligations
  • This liability can be caused as a result of acts committed by EMPLOYEES of the company.
  • All responsibilities and decisions are the owner’s responsibility.
  • Others won’t usually invest in a sole proprietorship

A Partnership has most of the same attributes of a sole proprietor. The main difference is that instead of one owner being responsible for the business 2 or more owners are equally liable for a business.

An LLC aka Limited Liability Company is a way to safe guard you being liable for everything in the business. With an LLC you are still taxed similarly than a sole proprietorship or partnership but you are released of a lot of personal liability.

LLC Pros

  • The business owner isn’t liable for all the businesses debts.
  • In most cases the owner is not liable for lawsuits against the business.
  • You can name the business whatever you would like if you file a FBN. (Fictitious Business Name)

LLC Cons

  • You need to pay extra state fees yearly for filing and registration.
  • There are more laws you have to follow with LLC’s.
  • You MUST keep all bank accounts and financial records separate from personal accounts.
  • You must keep LLC in the name of the business. Ex. John’s Plumbing LLC.

    How to open a Limited Liability Company?/ Do you need a lawyer?

    If you want to go at it alone you can technically open an LLC on your own. It is not required to hire a lawyer to open your own LLC. But it would be much easier and time effective to, at the least, hire a site like legal zoom, rocket lawyer or a similar site.

    Every state has a different process for forming an LLC so you will have to contact your specific states guidelines to file.

    You will need a few things to get the process started

    • Money for a filing fee. (different for every state but usually close to $300 a year)
    • A proper operating agreement (This states the rules of your company)
    • An EIN and a bank account dedicated to only your business
    • You will also need to keep proper accounting records and report them annually to your city and state

    If any of this seems out of your area of expertise you may want to consider hiring a local lawyer or using an online service like the ones listed in this article.

    Are you ready to from a business entity? / What are your sales?

    If you are starting a new business, you may want to hold off on deciding how to structure your business. I wouldn’t spend much time forming a business entity until you are ready to make sales. If you don’t have any sales or employees you won’t need to worry as much about being liable for anything.

    Make sure to keep all receipts for anything tied to your business. This way you will be able to keep track of your expenses and be ready for tax time.

    Before you decide to file for a C-Corp, S-Corp, LLC, Partnership or Sole Proprietorship you may want to do a little more research and set up a 30-min consultation with a trusted business lawyer.

    What do you have to lose? / Is it worth risking everything

    you want peace of mind. Open an LLC.

    If you don’t want to be personally liable. Open an LLC.

    If you own a home and don’t want to lose it. Open an LLC.

    If you have nothing to lose. You may want to consider a Sole Proprietorship.

    The decision is up to you but I recommend an LLC to help you sleep at night. All the fees associated with opening the LLC are tax detectable so if you have a profitable business it doesn’t really cost you anything. When you think of it this way it is a no brainer.

    Better safe than sorry.  

    This is just an opinion from my experiences. This is not legal advice. If you want legal advice I recommend you use one of the services below or hire a licensed attorney.


    Legal Zoom

    Rocket Lawyer

    Please leave any questions or comments you have below.

    I hope this helps you decide which business entity is right for your business.

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