Legal Structures – which one is right?

Round and round I went on the freakin’ business structure merry go round trying to figure out which one was right for me.

I talked to an accountant. I talked to a lawyer. Each of them had different things to tell me, which were, in my head at least, at odds with one another when it came to what business structure was right for my small business.

Now before I get deep into this: I am NOT an attorney. I am NOT an accountant. Go talk with your own attorney and accountant. Yes, this is my “cover my ass” statement. Do your own due diligence because what works for me may not work for you.*

*Hey, in life there are no guarantees. If you’re being a dufus and hurting people, then you’re probably gonna get what’s coming to you in the form of law suits and tax crap no matter what kind of business structure you choose. Even when you’re choosing a path of love positive business practices, just ’cause you move to a different structure doesn’t completely prevent stupid crap from happening.  When you take action in this area, it means you have a plan in case it does.

I break it down like this; You got two things to think about:

• Risk (some jackass suing you)
• Taxes (how much fair share we gotta tithe for the greater good of all)

There are several different ways you can cover your risk and deal with your taxes and really they depend on how much money you make, how you work with people, and your general level of personal risk you’re willing to take.

Think of each option as a Yin/Yang. There are benefits, restrictions, and costs to EVERYTHING.

1) The Sole Prop.

It’s all on you. Everything you do, say, print, share. Some jackass doesn’t like it, they can sue you for your business, house, and precious tidy whiteys. You better get some business insurance. (talk to your insurance agent, or mine if you’re in California. Mine does a great job of explaining all of the insurance stuff.)

Same thing with taxes. You’re filling in a Schedule C, itemizing (or not) and pay full whack. Yes, you can deduct the hell out of stuff. The flip side, when you deduct, you don’t show income. So if you’re a sole prop/self employed, deduct everything, and want to buy a house, it’s tough because you don’t show any income which is what you need to buy a house. No, you’re not totally SOL, but it’s a little tougher. Think about the big picture here.

2) LLC/LLP and Corporations (S and C)

Each of these options limit your liability and at different levels by pretty much separating your personal self from the business. Which means said jackass will have a tougher time getting your personal home, car and aforementioned tidy whiteys if they choose to sue you. Saying that, some people are very motivated. (See the above *).

On the tax side, each of these has different levels of taxes due for the priviledge of having one of these “entities”. With an LLC/LLP or Corp you are now paying tax(es) for the thing itself in addition to your own personal income tax. If you’re making a chunk of money, these are good structures to think about because of the tax credits available that don’t present themselves for sole props and some other groovy benefits depending on what state you’re in. There are regular financial costs to these structures, you do pay to have one of these. Costs and benefits here people.

So go, my friends, go find an accountant who you’d be okay with doing your Mom’s finances and a business attorney who works with someone you know is making money hand over fist.

Interview them. Ask them what think, they charge, how long they’ve been in business, and what they look for in a business client. Because you need to have a relationship with these people BEFORE you need them. Be prepared to budget their services into a line item in your finances.

An ounce of prevention here really is completely worth a pound of cure.

Jessica Clark is the founder of Room To Breathe where she asks small business owners, “Are you ready to work smarter not harder?” and teaches the true value of systems.