So you’re finally going to take the plunge and set up a small business. Depending on the type of business you’re going to establish you may be wondering if you should set up an LLC , Partnership or Sole Proprietorship . It’s always best to consult with a lawyer and/or your accountant to determine which one is most appropriate for your situation. And your business model may evolve over time so it’s a smart idea to re-evaluate your setup annually. Preferrably at the end of the calendar year so you can be set for tax purposes the following year.
For my business partner and myself, we started out with an LLC (Limited Liability Company). When we created our business model it entailed going on-site to various locations where we would be in contact with hundreds of people. We were concerned if someone tripped or got injured due to our equipment and felt that an LLC was the most appropriate for our business (photography).
But, as with most companies and business models, things evolve. Two years after we set up shop our original model went through some changes and we learned a lot along the way. Here are a few things to consider from our experience:
First, learn the difference between the various ways you can establish your business. An LLC, as mentioned above, is a Limited Liability Company. As the name implies, forming this type of business limits the personal liability you might incur due to something like a lawsuit against the company (not the individual). For instance, let’s say your equipment was in the middle of a hotel ballroom and a woman tripped and fell. If she broke her arm there’s the potential that she could sue you for wrecklessness. In theory she could sue your LLC, but your personal assets would be protected. There are instances where your personal assets may not be fully protected in the case where fraud or misrepresentation exists. But let’s not go there. We know you are an honest business owner. But for all intents and purposes, the LLC protects your business from your personal assets. But don’t forget, you will still need to purchase business insurance to protect your equipment against loss or damage and depending on the nature of your business, you may want to get additional liability insurance.
In the state of California, the annual LLC fee is an astronomical $800. In the state of Nevada, the fee is only $75. The cost of doing business will vary from state to state so you have to do your research and find out what those fees are. If you set up a business that has transactions in mutliple states, you will probably have to purchase an LLC for every state you do business in. Something else to think about.
But now let’s say your business model does not have a high risk. You are dealing mostly with individual clients such as families or events. Your team consists of you and one or two other partners. In that case, a General Partnership may be more approrpriate (and probably less expensive). With a General Partnership you need to put an agreement in writing that outlines everyone’s roles and responsiblities, how profits and losses are distributed, and how debts are incurred. In most cases all assets are equally owned. But all of this should be clearly spelled out in the agreement in the case of dissolution so that everything is fair and square at the end of the day. A joint bank account in the name of the partnership enables easier settlement of monetary transactions. Business credit cards or debit cards (I recommend credit cards only because it is hard to keep track of debit transactions from two or more partners) should be obtained to keep personal and business purchases distinct and separate. In addition to the GP, you will also need to acquire business insurance which will protect any hardware and other equipment and provide liability insurance.
If your business consists of just you, then a Sole Proprietorship makes sense. This is where the business is owned and run by one individual and there’s really no distinction between the owner and the business. The owner is responsible for all loss and profit, reporting all taxes, and incurring all debts. You should still obtain business insurance to protect any costly equipment and for liability purposes. If you’re dealing with clients you should protect any risk that may occur. Having a Sole Proprietorship may entail registering with the state so it is on record, and possibly with the city or county to obtain a license that shows you are doing business out of your home office. The benefits of having a small business are many. You can deduct the cost of doing business including the portion of your home that is dedicated for your company, your business mileage, supplies, professional fees and other business related expenses.
Having a Sole Proprietorship does not prevent you from working with others. You may have another business buddy who has a client that requires two people with the same skill set. Agree up front how you will be paid but the two of you can work the job together. It is a great way to get more experience and continue building your portfolio and network. Be sure your business buddy knows you have a sole proprietorship and that you are protected with business insurance.
How did you set up your small business?
Key Resources: It varies by state. Google using “LLC State” (for instance “LLC California”) and you will get a link to the Franchise Tax Board. You will also be directed to the Secretary of State’s link where you will find all necessary forms and instructions to go about forming your business.