Freelancers are often overwhelmed by the idea of setting up an official business entity, and don’t know the pros and cons of each type. This guide can help you decide what business entity is the best for you, and set it up.
Before registering any type of business, make sure that your desired business name is available and not already in use by another entity. Start by doing a search on your state’s secretary of state website, the United States Patent and Trademark Office site and Google. This is not an exhaustive search list, but these search tools will help to decrease the chances of any obvious problems with your chosen name. Failure to do such an investigation may result in legal and financial ramifications down the line.
Determine where you want to register your business. Delaware, Nevada, and Wyoming are popular choices, usually for the following reasons:
On the other hand, registering in your home state has its advantages, as well. Keep in mind that registering your business in a state other than your home state might require you to file additional paperwork (which might result in more fees and taxes) in your home state.
Let's go step by step for each business type:
A sole proprietorship is a business owned by one person without forming a legal entity, while a general partnership is a business made up of two or more people operating a business without forming a legal entity. If you are operating a business under any other name than your own, you may be required to register for a “Doing Business As” certificate. Another factor worth noting is that personal and business liabilities are not separate — you will be personally liable for all business liabilities, and vice versa.
An LLC is a formal legal business entity that gives the owners limited liability (personal and business liabilities are kept separate), as well as pass-through taxation. Creating one requires the following steps:
An S Corp is a domestic, formal legal business entity that gives the owners limited liability, as well as the choice to have pass-through taxation. S Corps generally have more strict requirements than other types of business entities.
No matter what type of business entity you choose to form, ensure you do the following to help keep your business in order and out of legal hot water:
This report is solely for educational purposes. It is not advice and should not be viewed as such. Please consult with an attorney and accountant for guidance on your specific matter.
Marina Warner, an attorney, is the principal of The Warner Firm, based in New York City.