I get asked a lot about entity selection. What type of entity should my business be? That question, like all others in business…DEPENDS.
Entity selection is not a hard and fast rule
Just because your neighbor or the other mom at dance has an LLC doesn’t mean your entity should be an LLC. Your neighbor is a plumber with 5 working trucks, equipment and a team of 11. The other mom at dance is a solopreneur selling through an established MLM. Your circumstances are different. If your treadmill friend tells you “you need to be an LLC for the tax benefits”…run. They have no idea what they’re talking about. My tip to you, an LLC does not exist for tax purposes and is simply a legal vehicle.
Your attorney can give you more details. This is where you need to have a relationship with a trusted advisor to discuss the options because there may be Business or tax reasons for an entity selection. You should also consider the legal side of your industry. Either way, have the discussion with your accountant and attorney.
Entity selection may need to change over time
The selection you made at inception may no longer be the right fit as your business grows. Tax laws change and the business environment changes, which makes one option more advantageous than another. First and foremost in the selection process…Keep It Simple Stupid (KISS). You heard me right, the KISS method of keeping it simple. I’ve had conversations with entrepreneurs to find out they have over complex entity structures that become costly compliance nightmares on an annual basis.
Simple and Straightforward? Not Exactly
Question one – do you have a general idea where you want to go with your business? You will change. The business will change. What are your intentions with your business? For example, If you are a freelance writer and that’s what you plan on doing then a sole proprietor with a Schedule C for tax purposes may be sufficient. If you’re expecting to make boat loads of money as a freelance writer, the sole proprietor option may not make sense for tax purposes. It may be too costly in taxes.
You can see just in this basic example, it’s not simple and straightforward. Each business is unique and should be approached as so. There will be caveats to each situation and should be discussed with your trusted accounting and legal advisors.
To learn more about entity selection, connect with me at firstname.lastname@example.org, or on LinkedIn.