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Marina Warner

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.

 

Introduction

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:

  • Delaware uses The Chancery Court, which only hears business cases, and has a long body of corporate law
  • Nevada has no corporate taxes and doesn’t share information with the IRS, and has stronger protection for personal assets of shareholders, officers, and directors than other states
  • Wyoming has many of the same benefits as Nevada, but also has low fees, very few annual requirements, and isn’t required to make public the names of LLC members or corporate shareholders

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: 

 

Sole Proprietorship or General Partnership

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.

  1. File a “doing business as” certificate (DBA) with the county clerk in the county where your business is located and pay the filing fee
  2. Apply for a federal EIN (Employer Identification Number), which you will need for tax purposes and to open a bank account in your business’s name.

 

Limited Liability Company (LLC)

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:  

  1. File “articles of organization” with the appropriate government entity in the state you choose to register your business and pay the filing fee.   Articles of Organization is essentially a charter establishing the existence of your LLC in your state and contains specific information about the business.
  2. File for a federal EIN
  3. Draft an “operating agreement,” a set of rules that determines how your business will be operated.  The operating agreement is not part of public record, but a copy may need to be kept at your primary place of business, depending on the state
  4. Depending on the state, publish a notice of your LLC in a local newspaper and file an “affidavit of publication” after your notice has been published for the requisite amount of time

 

S Corporation (S Corp)

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.  

  1. File “articles of incorporation” with the appropriate government entity in the state where you choose to register your business and pay the appropriate filing fee.  Articles of Incorporation is a charter establishing the existence of your corporation in your state and contains specific information about the business
  2. File for a Federal EIN
  3. File Form 2553 (Election by a Small Corporation) with the IRS to select your S Corp status
  4. Draft “bylaws” for the corporation, which will serve as a set of rules governing how your business will be run. These do not need to be filed by the state, but a copy may need to be kept at your primary place of business
  5. Conduct other corporate formalities, including issuing stock, having initial and annual director and shareholder meetings, and taking and keeping meeting minutes

 

Conclusion

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:  

  1. Hire a lawyer and accountant
  2. Keep your business and personal finances separate by opening a business bank account
  3. Have board meetings as required (S Corps)
  4. Keep records of everything
  5. File taxes
  6. Keep up with annual filings (S Corps)
  7. Ensure that you have the proper licenses and permits to operate in your state

 

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.