There are lots of different types of business entities. Each has its own strengths and weaknesses. I’ll begin with a primer on the types of business organizations from which you have to choose.
These explanations are greatly simplified, because the truth is that a sound business strategy goes beyond mere compliance with the law and uses the law to its advantage. Lawyers should be a fundamental part of an entrepreneur’s team, helping to shield your business from risk and ensuring that you are positioned to achieve more than a gamble and at best a quick buck. Your business should be built to last, and a weak foundation doesn’t make a strong home. Choosing the right business entity is the first step in creating a successful business. It’s also the best shield to protect you in the case that your business fails. The wrong business entity could leave you and your family exposed to liability that could have otherwise been avoided.
- Sole Proprietorship: cheap and easy, but not very useful. Many entrepreneurs choose to become a sole proprietorship because it takes little time and money. To greatly oversimplify, all you need is to properly register and advertise a unique “fictitious name”, obtain the required local, state, and federal permits, register with the Department of Revenue to collect sales tax (if applicable), obtain an Employer ID from the IRS (if you have employees), and obtain Workers’ Compensation insurance (if you have enough employees).
The problem, is a “sole proprietorship” is no more than an alter ego of an individual. In the eyes of the law, there is no distinction between sole proprietorship and individual. If your business gets sued, you get and, and vice versa. Simply put, unless you thrive on needless risk, there is no reason to operate as a sole proprietorship. As subsequent parts to this series will explain, an LLC or corporation is remarkably simple to setup and use, and provides invaluable protection to the business owner.