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Setting Up Business Structure

Everything in life needs a little structure, a skeleton on which the rest of it will be built. The same is true with a business. A business needs a certain legal structure in order to operate. In fact, it's required. It can seem kind of confusing at first, but you'll realize that it's actually easier than you originally thought. We'll walk you through each of the various ways to form a business to help you decide which one is best for you.

Sole-proprietorships (best for very small businesses)

As its name suggests, a sole-proprietorship is a business that only one person owns and runs. It's the easiest way to get a business up and running. Usually all that's required is that you go to the county clerk and fill out an "assumed business name" form that registers the name of your business with the county, and costs around $10 to do. However, some places require that you also publish a notice in the local newspaper. Check with your county clerk to see what your county requires.

The biggest benefit that a sole-proprietorship offers is that it's easy to set up and run. You don't have to worry about filing separate taxes because all of the money that the business makes will go on your own tax forms. And you're not required to comply with a number of federal and state laws.

There are some downsides though. One big kicker is that we live in a society of lawsuits with people trying to make an easy buck. If your business ever got in legal trouble and you got sued, you'd be liable for all of it. If someone sued your business for $1 million, you could lose your house, car, everything.

Partnerships (best for very small to small businesses)

Partnerships are a lot like sole-proprietorships. The big advantage is that it allows you to have business partners to share in the costs of running the business. But like sole-proprietorships, each person is also liable for any legal judgments and any debt that the business takes on. If you want to start up a partnership, be sure you can trust your business partners. If they screw up, it can end up hurting you too!

Corporations (best for medium and large businesses)

If you're worried about getting sued or if you intend to grow into a very large and profitable business, you might want to consider forming some kind of corporation. Corporations are "limited liability", which basically means that the owners aren't responsible for any debts or legal settlements incurred by the business. So if the business fails, the worst that will happen is that it'll declare bankruptcy. You'll still get to keep your house and car.

Corporations are usually preferred by business owners because they allow you to hire employees. They also make deducting expenses from the taxes a little easier. However, if you're one of the only employees of the business and intend to pay yourself with the profits, you'll be taxed twice. The business will be taxed by the money it makes and then the money you pay yourself will be taxed as personal income. That can really take a big chunk out of the earnings.

Incorporating isn't free. Some places online like bizfilings.com will help you do it for a few hundred dollars. But if you're worried about screwing things up or you don't understand the process, you'll either need to hire an attorney or accountant who is an expert in it. They can charge anywhere from $1,000-3,000 for these kinds of services.

We've taken a little bit of time to prepare the table below to help you decide which one will be best for you:

 

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