Staff Writer, @DooleyNotedLaw
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After forming a Business Plan, we recommend a few extra steps to make your small business idea official. In this blog post, we will outline the most common entity forms, and the steps you need to take in order to make your small business idea official.
You may have already figured out what you want your business to look like, but deciding the type of entity you need to make your small business idea official might sound daunting. Each type of entity has its own set of benefits and drawbacks, so it’s important to choose the right entity for your business. Below, we’ve broken down the most common entity types and explained each one.
This is the simplest way of structuring your small business to protect personal assets. Over 80 percent of small businesses owners have LLCs, and for many good reasons! With less requirements and more flexible ownership options than the other entities, LLCs provide small business owners with limited liability protection. This means that the company assets are typically owned by the LLC. This provides a degree of separation from personal assets and business assets.
An LLC is a great option for those who want to minimize risk when you make your small business idea official. An LLC also offers more management flexibility and protection. If your business goes into debt, an LLC will protect your personal assets. This means collectors can’t go after your personal assets for outstanding business expenses.
Additionally, an LLC offers less complex tax filings. With an LLC, net income or loss is “passed through” to the personal income of the business member (or members). This means, the IRS taxes profits and losses as personal income for state income and taxes income as a simple partnership or sole proprietor for federal income tax.
An S Corporation (or S Corp) is a special type of corporation that draws its designation from Subsection S of the tax code. While S Corps have more operating requirements and ownership restrictions than an LLC, they also have significant advantages. Like that of the LLC, the S Corporation receives pass-through taxation.
However, unlike an LLC, forming an S Corporation gives business owners the ability to minimize payroll and self-employment taxes when making their small business idea official. This results in significant savings in certain situations! Since the company is separate from the shareholders, it allows them to sell shares without impacting the business.
A C Corporation (or C Corp) often called a generic corporation, stands as the oldest and one of the most common business entities. The IRS classifies a C Corp as a completely separate tax and legal entity from a small business owner. The business itself is legally liable for actions and debts rather than the shareholders.
While all business entities can provide fringe benefits to its small business owners and/or employees, the C-Corp allows for a greater range of fringe benefits. Forming a C-Corp is also advantageous to corporate tax treatment and income splitting. The tax rate on corporate income is usually lower than the tax rate on personal income up to the first $75,000 in income. The small business owners can arrange salaries and bonuses in conjunction with retained corporate earnings to lower their overall tax rate.
This is an organization established to give back to the community or help those in need of a particular service. A Non Profit is also eligible for tax breaks. A Non Profit corporation is a corporation whose principal purpose is public benefit. It provides a shield against potential liability for its directors, officers, and employees.
Despite this entity’s name, a Non Profit Corporation may generate a profit. Non Profit does not literally mean that your corporation cannot make a profit. A Non Profit Corporation can acquire more income than it spends on its exempt purpose. This profit can be utilized for operating expenses, including salaries.
Once you’ve decided on the entity type, the state requires a few more things to make your small business idea official. Keep reading to learn more.
Once you’ve decided on the entity type, you’ll need to come up with a creative and catchy name for your small business. Choose a name that people can easily pronounce but also a name that makes a statement.
It’s also possible to choose an entity name that’s different from your customer-facing business. We call this a DBA (or Doing Business As).
It’s best to have a list of names for your small business idea. After you have this list, you need to find out if the names are available. Lawyers and entity formation companies can assist you in running a taxable entity search to see if your small business name is available. Your small business name needs to be unique in your state, so don’t get your heart set on a particular name before running a search.
Next, simply register your business! You need to fill out the necessary forms and pay the required fees for the state. As a small business lawyer in Texas, Dooley Noted will help you file your entity with the state. You can also check out services like LegalZing that can assist you in forming your entity and making your business idea official.
As a small business owner, you are responsible for making sure your business has the proper federal, state and local licenses and permits to operate legally. A business license is a certificate that authenticates that your company is properly registered with the particular county or city in which your office is located. Every new business must apply for a business license, and your corporation or LLC may need more than one license or permit to fully operate at the state level.
If you operate from home or plan to remodel a space, for example, you’ll need to obtain permits to make your small business idea official. Other permits may cover serving alcohol, displaying a sign on the building exterior, and even designating parking for your business. Check out this link to research your local zoning and operating laws.
Let’s be real. Taxes are complicated. And, filing your business taxes can be more difficult than personal taxes. Filing a business tax return is part of the annual requirements for managing your small business taxes. If you know this is one of your weak spots then you should plan on getting help so you can avoid the headache.
When tax season arrives, it’s important to understand your options for filing business taxes. IRS requirements for small business taxes can be complex, and details will depend on the type of business entity you form.
After filing all this initial paperwork, states require ongoing filing requirements that you must complete in order to maintain good standing. Each state prescribes specific rules regarding when Annual Reports and franchise tax reports are due. Many states require the Annual Report to be filed on the anniversary month of the company’s date of formation, while some states set a specific filing date for corporations and another for LLCs.
Don’t rush over the important steps of making your small business idea official. Start with a solid foundation. This all might sound overwhelming, but don’t let that stop you from reaching your goals.
As a small business lawyer in Texas, Dooley Noted take care of the details. So you can handle what you love the most about your small business.
The contents of this post, and the posting and viewing of the information on this post, should not be construed as, and should not be relied upon for, legal advice in any particular circumstance or fact situation. An attorney should be contacted for advice on specific legal issues.
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