“How to Choose a Business Structure and Register Your New Business” is part of my ongoing Business 101 series for women (and others) looking to start their first business or a new business. See the other existing articles here.
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So you’ve brainstormed names, checked them against trademarks and existing business entities, and finally landed on a name for your business. The next step is learning how to set up your business, and what different business structures mean.
First, let me say that although these technical steps might seem confusing or feel overwhelming (I know I sure felt overwhelmed, at first), there aren’t as many choices as you might think. To put it another way, all of this information is leading you to one choice, one business structure, and it’s not so much a matter of choosing your structure as seeing where you fit and following those directions.
It’s kind of like trying on a dress. You don’t choose a size from every size available–one size fits better than all the rest.
It’s all a matter of just going through the steps to find the perfect fit. So let’s dive in.
Each business structure has its own benefits and drawbacks. I’ll define each one below, but the three that are most likely relevant to you are Sole Proprietorships, LLCs and possibly Partnerships. Feel free to skip over any sections that don’t apply to you.
This is the most common business structure. As the name implies, a Sole Proprietorship means that one person owns and operates the business. For example, a freelance writer could have a Sole Proprietorship. Or a certified public accountant who does your taxes, a website designer, a home organizer, etc.
In a Sole Proprietorship, the owner is responsible and liable for all of the business’s debts and liabilities. That means if something goes wrong and your business gets sued, you’re getting sued. In the eyes of the law, you and your business are one and the same, so unlike other business structures, a Sole Proprietorship offers no legal protection distinguishing between your private assets (your car, home, savings) and your business assets.
Because you don’t have to do much to establish one. If you work under your own name, you don’t have to file anything at all. If you work under There’s nothing to file to set up, there are no annual filings with the state to stay current, and there are no government fees.
Not having to register with the state protects your privacy more than other business structure types. Additionally, your business taxes just get folded into your individual tax return, which keeps things simple.
You can also set up an Employer Identification Number (EIN), which gives you the ability to open a business bank account, among other things.
However, as a Sole Proprietor, you have the ability to do 100% of your business under your social security number. You just won’t have access to a separate business checking or savings account, or credit card. Filing for an EIN is free through the IRS website.
(Don’t fall for a stupid almost-scam like I did and pay someone $250 for the privilege of getting a free EIN.)
For example, it would be perfect for people who provide house cleaning, bookkeeping, freelance writing or design, tutors, virtual assistants, hair stylists, etc. They’re not likely to hurt someone or cause irreparable damage, which puts them at lower risk of being sued.
You can technically hire employees as a Sole Proprietorship, but you’ll be responsible for protecting not just your business, but your personal assets as well.
If a Sole Proprietorship’s weakness is that you could lose your personal property in a lawsuit, then you’ll understand why LLCs exist. A Limited Liability Company is an independent entity, so if you’re sued or your company goes bankrupt, your personal assets are protected. Only your business assets would be up for grabs.
Like a Sole Proprietorship, an LLC can also just be one person pulling all the strings, or an owner with employees. You can also file your business taxes with your individual taxes if you’re a single-member LLC, but just the act of having LLC generally confers more credibility with customers or clients.
Also, you can hire your spouse to work within your company and still qualify as a single-member LLC. That can be advantageous for your taxes, allowing you to keep more money as wages within your family, as well as set more money aside in tax-sheltered retirement savings for both you and your spouse. (Which would further reduce the amount of taxes you would owe.)
The fees for setting up an LLC and filing annual paperwork varies widely from state to state. For example, in Michigan, setting up an LLC costs $50 through the state, with a yearly fee of $25. But in Massachusetts, setting up an LLC costs $500, with another $500 fee accompanying the annual filing. Most states are nowhere near that much, but taking the cost of filing and maintaining an LLC in your state may sway your choice.
If you’d prefer the peace of mind and convenience of having someone file your LLC paperwork for you, I recommend Nolo’s LLC Packages, which start at just $49. They’ll help you validate your preferred business name, create your articles of organization and they’ve got great customer service ready to answer all your questions. I had help setting up my own LLC, and while it’s not a requirement (you can definitely do it yourself), if you have the money to spare, it does simplify the process.
For example, opening a business bank account will typically require an EIN, but allows you to keep your business income and spending separate from your personal accounts.
Like a Sole Proprietorship, you don’t strictly need an EIN if you’re a single-member LLC. Technically, your Social Security Number is all you need to get paid and file your taxes. But banks do generally require an EIN to access their business resources, so you may choose to get one. Filing for an EIN is free through the IRS website.
(Don’t fall for a stupid almost-scam like I did and pay someone $250 for the privilege of getting a free EIN. Yeah, I’m gonna keep saying it in case people are skimming…)
Ultimately, an LLC can overlap a lot with a Sole Proprietorship, but it comes with a few more responsibilities and a lot more benefits.
Partnerships are a business structure available if your business will be owned by two or more people. Partnerships come in two kinds – General Partnerships, where all the owners are equally invested and equally responsible for business liabilities, and Limited Partnerships, which can include general partners as above, but may also include limited partners, like investors, who have limited input into the running of the company but also carry very little or no liability. So if a Limited Partnership gets sued, the limited partners/investors personal assets are not up for grabs.
It’s simple to set up – you may not even need to file paperwork with the state, depending on your name. Also, like an LLC and Sole Proprietorship, profits and losses pass through to the owners’ personal tax returns.
Having a partner can make running a business easier. For one, you split the cost of starting a business, and banks may be more likely to offer loans to businesses with partners. If you plan on having formal investors in your company (rather than, say, having Aunt Rita loan you a few hundred bucks to get started), you’ll need to establish a partnership.
Like an LLC, a Partnership also allows you to get an EIN, hire employees, and put money aside in retirement savings (unlike a Sole Proprietorship). You’ll need to pay to file your Partnership with the state, and it’s a good idea to draft and sign a partnership agreement.
Contracts are always a good idea, particularly if you’re forming a business with friends. Why? Friends with any kind of history tend to bring their own assumptions into any situation, whereas starting a business with a near stranger means you’d have to explicitly discuss all the little details anyway.
So just do yourself a favor, explicitly discuss all those little details anyway, like how much each person contributes, the allocation of profits and losses, how to admit new partners down the road – and protect yourself with a contract. Don’t just assume because you’ve known someone for a long time, you can skip this step. (Please don’t skip this step.)
Just by being here, I’ll hazard a guess that you’re not looking to set up a Corporation of any kind, as they have a totally different set of rules and regulations.
That means most of you will be setting up Sole Proprietorship or LLCs – which simplifies things a great deal.
By now, I hope it’s clear which structure will work best for you. Although Sole Proprietorships and LLCs have different benefits, they’re very similar. But if you’re still stuck, or you’re waffling, or you’re just unsure, let me break it down even more. (Obviously, this is just my opinion.)
The benefits and services afforded LLCs make them not just a safer choice (against lawsuits), but a more practical one, as you’ll seem more legitimate, have access to more financial services, be able to take advantage of more tax advantages, and you won’t be personally liable for business debts.
And Partnerships are self-explanatory. If you’re forming a business with another person, this is the way to go.
Babes, I’m so glad you asked. Let’s break it down even more with a step-by-step checklist of all the steps you need to do to set up your business.
Note: The checklists below assume you are a single-member business, like the 90% of all women-owned businesses, or a simple partnership. If you plan on having employees right away, you’ll need to add steps for hiring, setting up payroll, and securing more insurance if necessary.
Nolo’s LLC Packages start at $49 and cover name validation, creating and filing articles of organization and a custom operating agreement, if you’d rather pay a service to handle this for you.
And honestly? That’s it. (That’s the tweet.)
That’s how I wound up paying $250 for a free EIN. I was applying for a business bank account one day with my LLC Articles of Organization in hand, and the bank required an EIN. I put in my Social Security Number, thinking that would suffice, but I got a phone call from the bank saying I needed a true EIN, and they were going to cancel out the application so I could submit a new one that day.
And in my rush, I searched for “Get an EIN” and clicked on the first result that looked legitimate. I didn’t even realize that I could get an EIN for free until weeks later when another female business owner I trust mentioned it. And wow, did I feel foolish.
Hopefully, seeing all these steps laid out methodically with references is enough to give you confidence. After all, think of all the crappy small businesses you may have crossed paths with in your life — contractors who don’t show up when they say they will, local businesses whose phone numbers on their sites are disconnected, etc.
And of course, because this starting a business is a complex process with multiple steps, be sure to pin this post to your Pinterest. Not only does it help me out, but you’ll always know right where to find this reference in the future.
Still have lingering questions or looking for clarification? Leave me a comment below and let me know how I can help.
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