CREATE A BUSINESS ENTITY

There's a Reason Successful People Own or Control a Corportion or LLC. It Is the Same Reason You Should Create a Business Entity.

Virtually everyone who is successful in business will create a business entity at some point. Why? Because creating a corporation, LLC, or other legal entity allows you to keep more of your money. That is the bottom line.

Government grants special deductions to business entities that it doesn't grant to individual humans. So, to maximize the amount of money you get to keep, and minimize the amount that you have to fork over in taxes, you need to create a business entity at some point.

It does cost money to do this. It may cost time and money if you don't pay an attorney to do it for you. You also may not be ready to create a business entity at this moment because you simply can't afford to do so. Even if you can't afford it, be thinking about it.

Create a Business Entity: Who?

Every business owner should create some form of business entity.

Eventually, you will be throwing money away if you don't create a business entity and operate your business through it. The financial flexibility gained through use of a corporation or LLC, and the money saved through reduced taxation, makes the decision to form one a no-brainer. Deciding when to do it may be more difficult.

Create a Business Entity: When?

Ideally, you should create a business entity as soon as you can. If you have the means to do it, do it. There are expenses associated with forming a corporation or LLC, so you do need to consider when prudence directs the formation of yours.

Only the bold should create a business entity before taking any other concrete steps to ensure your business is viable. For website or blog businesses, it may be a good idea to wait until the development phase.

By waiting until the Website Development phase, you haven't lost much (if anything) other than the time you have spent developing your niche concept. By that time, you should have your niche and site concept ready, and you will likely be at the point where you may start incurring expenses that can be tax-deducted if you have created a business entity.

That is why this section is where it is on this website. The next step (Website Development) can have expenses associated with it. Even though they may not be outrageous, it is still better to be able to deduct them from your taxes, after consulting with your CPA or other tax professional.

Create a Business Entity: Why?

There are three main reasons why you should consider creating a business entity.

The first reason: we live in a country where lawsuits are as common as grass. Forming a business entity, particularly a corporation or LLC, creates something called a "corporate veil." The corporate veil is an invisible legal barrier between the business and you as an individual.

If you start a business without creating a business entity to take care of everything related to the business, you set yourself up for total loss if you ever get sued and lose. By creating a corporate veil through a business entity, you create a legal separation between your individual assets and your personal assets.

In other words, you protect yourself. If your business causes damage to someone, or if it is sued becasue it sold coffee to someone who then spilled it on themselves, you may lose the case. If the reparations are, say, ten million dollars, you may not be able to pay it. If that were to happen, your business may have to declare bankruptcy, but everything you own personally would likely be safe and "untouchable."

However, if you don't form a business entity and don't have a legal barrier separating you from your business, you are at risk. If your business got sued (and lost), everything you own can (and probably would) be taken. Your house, your cars, whatever you own would likely be liquidated to make recompense to the "victim."

Don't let this happen to you! You would be wise indeed to form a business entity. Should you be sued, you should at least have the peace of mind knowing your personal assets are separated from your business assets by the corporate veil.

The second reason: taxes. As mentioned above, creating a business entity is a key step in minimizing your tax burden. Businesses that are legally structured as a business entity are able to legally retain more money than those that aren't. Again, talk to your CPA. You have begun to Develop a Business Team, correct?

The third reason: financial flexibility. Not only do you pay less taxes, but owning a business that is structured as a corporation or LLC opens up worlds of opportunities to a successful entrepreneur.

Why create a business entity? To protect yourself, to keep more of your hard-earned money, and to open doors financially that would otherwise be closed to you. There are other reasons, of course, but those are the top three.

Create a Business Entity: Which?

There are five main types of business entities: Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Partnership, Corporation, and Limited Liability Company.

There are advantages and disadvantages to each type of business entity. However, the disadvantages outweigh the advantages for most.

Depending on the specifics of your situation, it is highly likely that forming a Limited Liability Company or incorporating is the best option for you.

I chose to form an LLC over a corporation for several reasons. The LLC allows me to keep the flexibility of pass-through tax status while providing the liability protection I think everyone should have. Additionally, there are fewer maintenance requirements for the LLC. And, they are relatively easy to form.

I recommend every business owner create a business entity. The vast majority of those people will be best served by either forming a Corporation or Limited Liability Company.

Create a Business Entity: Where?

There is a lot of hype about where you should incorporate or which state should be home to your LLC. There are some legitimate things to consider about different locations.

However, the best option for the vast majority of people is to create their business entity in the state where they live. If you plan on doing any sort of physical transactions through your business entity, the costs will ramp up if you form your entity outside the state where you reside.

You will likely have to foreign file in the state where you live in order to legally do business there as a business entity. This cost varies from state to state and is quite expensive in some states. You'll also likely have to maintain a registered agent in the state where the business entity legally resides (if different from your own personal residence). That costs money, too. Most people will be better off if they create their entity in the state where they live.

With that said, there are several potential benefits to incorporating in a few special states. You may have heard radio commercials encouraging people to incorporate in Nevada or Deleware. The reason is that those two states have very favorable laws regarding business entities created therein. Additionally, for individuals seeking extreme privacy, it is possible to essentially complete anonymity if one forms an LLC in New Mexico.

For my own Limited Liability Company, I chose to form in Nevada. Nevada, undoubtedly, has the strongest corporate veil of any state. As long as your business is honest, a lawsuit involving your business should be completely isolated from your personal assets. Additionally, the tax benefits are excellent as well.

Create a Business Entity: How?

There are three main ways to create a business entity. You can do it yourself. You can use specialty services to form it for you. You can pay a lawyer or CPA big bucks to do it on your behalf.

Each of these methods have pros and cons. If you do it yourself, you better know what you are doing and not miss any step. Doing so will likely "pierce" the corporate veil you are trying to establish for liability protection and result in your personal assets being placed at risk.

If you use a specialty service, they will likely ensure that everything is taken care of at a reasonable price.

If you pay a lawyer or CPA, you'll likely get things done correctly also, but at a higher overall price. It can be a benefit, however, to have a personal relationship with a professional in the area. Both a Corporation and LLC require maintenance, and it can be very helpful indeed to have a local person with whom you may consult.

I used a specialty service. Specifically, the Corporate Service Center. They have done and continue to do a tremendous job. They will answer your questions free of charge and help you every step of the way.

Create a Business Entity: Conclusion

You can file the papers yourself, use a service to get you up and running, or pay a lawyer. Each option will get you to the same end result. But, for the protection and benefits that come when you create a business entity, you should definitely consider doing it.

Keep reading! Here is some Miscellaneous Guidance that will serve you well.