How to make your business official.
Started a business lately or thinking about it. It might seem overwhelming. That’s why we’ve created a checklist that includes everything you need to do to make your business official.
You might be thinking about forming a business entity, such as an LLC, C-Corp or S-Corp.
Here are the three (3) critical questions you must answer when selecting a business entity:
Why Should I Form?
1. Why? Forming a business entity protects your personal assets from legal liability, but only if used appropriately. Ask your attorney to avoid losing that protection.
Which Entity Should I form?
2. Which? It depends. Let’s tackle the LLC versus the C-Corp. LLCs are pass-through entities and income is taxed at the personal level. In contrast, C-Corps are taxed at the entity/company level, and shareholders (owners) pay taxes on the dividends. Note, few small businesses issue dividends.
Notably, In 2018, tax rates for C-Corps dropped significantly.
Where Should I form?
3. Where? Usually, the answer is Delaware. Here’s why: Delaware provides a predictable, accessible and well-developed body of laws. Meaning, if somebody’s thought of it or tried it, Delaware’s courts have probably already seen it. Investors are MOST comfortable investing in Delaware C-Corps.
That said, most small businesses are local, and if your lawyers are most familiar with local laws, it might make sense to file locally. Many New York companies file outside of New York State and then seek authorization to do business in the state.
What does this all mean? You should probably ask an attorney to provide an individualized assessment of your situation.
Here are a few articles to guide your next steps.
The Small Business Administration(SBA)’s website is Uncle Sam’s way of saying to small business owners, “we care!”.
The IRS’s business structure website is Uncle Sam’s way of explaining how you’ll eventually pay Uncle Sam if all goes well.
Nolo provides a very thorough summary of your options.
As always, this is not legal advice, and you know it.