How Do You Legally Set Up a Business?

Have you been considering pulling the trigger
on that million-dollar business idea? You’ve got a killer product and genius marketing
plan. But what about the finances, legal, and tax
stuff? LLC’s, Partnerships, DBA’s, S Corp…ahhh!! The sad truth is, too many people put off
implementing a good idea in the proper way because they’re intimidated. But fear not — we’ve got you covered. And it’s probably not as complicated or
as costly as you might think. So let’s get our Business Building Blocks
out and see what goes into building a business the right way. The first step is to put on your CFO hat and
get to work setting up your finances correctly. Do you need to set up a business bank account? Or is a personal checking okay if you’re
just starting out? Experts agree that the most important thing
is to separate your business money from your personal money. Completely. No leaks! It will help you avoid bookkeeping and tax
headaches before they start. And when you’re just starting out, using
a separate personal checking account can be fine, but eventually, upgrading to a BUSINESS
checking account can offer special benefits — like additional protection of your personal
assets if things go south. All your initial set up costs like a website
or logo-design should come from this account and not your personal one. It will also eventually be the destination
for income once those benjamins start rolling in. Now it’s time to decide on a legal structure. If your business is on the smaller side, you’ve
got some simpler options, like the Sole Proprietorship. A “sole proprietor” business has one owner,
you, and is not a separate entity under the law. If this is your choice, you won’t have to
file anything with the government to get started But you may be personally held responsible
for any debts the business might incur. And come tax time, all the profit or loss
from that business will run through your personal tax return. You can operate the business under your own
personal name, or you can choose to use a DBA or “doing business as”. For instance, when I had a professional organizing
business, I wanted my clients to be able to make checks out to “Swiss Miss Organizing,”
rather than my name. It just felt more professional. But before I could get a business account
called “Swiss Miss Organizing,” I had to file a DBA for that name. This is done at the county level, and most
counties allow for a pretty easy online filing process. There will most likely be filing fees, but
it’s usually under a hundred bucks. If you decide to share ownership of a business
with at least one other person, then you’ll need to form a partnership. It might be worth it to hire a small business
attorney to help you draft up an agreement. The money you spend will be WELL worth it
to have clarity of ownership and operating agreements. Small business partnerships implode all the
time due to vague or non-existant contracting. Partnerships require not only a DBA but also
an Electronic Identification Number, easily obtained from the IRS website. This acts like a social security number for
your business and will allow you to file a tax return for the business itself. BUT the business doesn’t pay income tax. Instead, it “passes through” any profits or
losses to its partners, meaning the partners are personally on the hook for any taxes…
or legal troubles. If that sounds scary, you might want to consider
a Limited Liability Company. The LLC shields the partners from most legal
responsibility and protects their personal assets should a client sue the business for
some reason. Putting an LLC in place can cost a few hundred
to a few thousand dollars, depending on your state and whether you hire a professional
to help you. That can increase the cost a bit, but it’s
better than finding out too late that you’re not protected because it was improperly set
up. Keep in mind that the advantages here are
for legal protection only. LLC’s don’t change how the partners are
taxed. For that, you need to go one more step up:
a corporation. The most common type for small business owners
is the Subchapter S-Corporation. Unlike all the other arrangements we’ve
talked about, an S-Corp is considered by the government to be its own discrete entity,
both for legal AND tax-related purposes. Instead of just absorbing the profits (or
losses), your business now PAYS YOU as an employee and/or owner. And because this income is taxed at a different
rate, it can mean some real savings. But there are costs associated with filing
for an S-Corp, and they can get pretty hefty. There’s filing charges, an additional tax
return you’ll have to get prepared, and likely ongoing charges for a payroll service. It all may be worth it for the tax saving
you get… or not. To know for sure, you should speak with a
tax specialist… which brings us to our final building block! Get some experts in your corner. Any small business owner will tell you that
when it comes to laws and taxes, one simple mistake can lead to massive headaches down
the road. Selecting the right business entity is just
one of the many critical decisions they can help you with. When you’re just starting out, we really
recommend building a relationship with a good CPA, bookkeeper, and small business attorney. It’s their job to help you make smart decisions…
while still playing by the rules. Building a small business might feel daunting
at first. But if you take your time, do your research,
and set things up right from day one, you’ll be reaching your dreams before you know it. And that’s our two cents! Sound Field is a new music education show from PBS Digital Studios that explores the music theory, production, history and culture behind our favorite songs and musical styles. Pop, classical, rap, jazz, electronic, folk, country and more… Sound Field covers it all. Hosted by two supremely talented musicians: Arthur “LA” Buckner and Nahre Sol. Every episode is one part video essay, and one part musical performance. So go subscribe to Sound Field! Link in the description below If you’ve ever formed a Partnership, LLC or S-Corp, tell us about your experience in the comments.


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