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Are you confused about which legal structure to choose for your business?
Choosing the correct type of business provides personal protection from bad business debt or judgments. Explore business entity types at least a couple of months prior to forming a business.
You’ll need to check with your state and locality to find out about licensing and permit requirements, as well as taxes. Some businesses are required to pay federal, state and local taxes.
Listen to lawyer and business expert Teresa Goody, CEO of The Goody Group, discuss considerations for choosing a legal business entity and where to find the information to make an informed decision.
Choosing Between S Corp vs LLC vs C Corp
Options for Business Structure Types
Greg: Hi I’m Greg Corombos and our guest this week is Teresa Goody. She is the founder and CEO of The Goody Group. This week she joins us to talk about a very important concept for aspiring and beginning small business owners, the establishment of a formal business entity. Teresa, thanks very much for being with us.
Teresa: Thank you for having me.
Greg: Let’s start with the basics. What is a formal business entity, and why is it so important for small businesses to have one?
Teresa: A business entity is incorporating a person and setting up a separate legal structure for that business. So the business will be separate from the person and the reason a lot of people do it is because it protects you personally and all your assets for being liable for any kind of debt or court judgment against your business. So it’s a good idea to have a separate entity for your business than it is for your person.
Greg: When should a small business owner start investigating this—well before they open their door, or right around the same time? What’s the timetable on it?
Teresa: You can actually incorporate quickly in the matter of a day, but you want to start looking into these procedures quite a bit earlier. It’s good to plan out your business because other than just starting your business and incorporating, there are a lot of other aspects to starting a business.
There are requirements of needing a business license and permits, and obtaining insurance and things like that. So you want to start and give yourself at least a couple of months. But, hopefully you’ve been looking into it a bit longer than that.
Greg: Of course there are a lot of different entities you can come up with— the sole proprietorship, partnership, corporation and S corporation. What are the main criteria in figuring out which is best for you?
Teresa: A lot of it depends on what kind of business you’re starting, and whether you’re doing it yourself or with other people. If you’re starting a company yourself, I generally recommend for people to open up either as a limited liability company (LLC) or a corporation as opposed to just starting out as a sole proprietor. Basically as a sole proprietor you can just hang a shingle, and that means you and your business are the same entity for all purposes taxes as well as liabilities. So that means if somebody sues your company, they can come after your assets.
But if you incorporate as a limited liability company, or some sort of corporation—which can be a C corp which we’re all generally familiar with and most corporations are, an S corp which is a small corporation, or a B corp which is a benefit corporation, and you have to be incorporated for specific purposes for that.
And if you’re starting by yourself, a lot of times people will just start with the simpler limited liability company, but a lot of it actually has to do with taxes. There’s a lot of different tax benefits to being a corporation or being a limited liability company, and so that’s something where you really want to spend the time and expense of getting a CPA to advise you of which will benefit you most tax wise.
As for setting up the entity, I would definitely recommend setting up some sort of company or corporation. And I want to note here something else that’s really important that a lot of people don’t know is that there are also professional corporations and professional Limited Liability Companies. And some people are actually required to set up these PLLCs (professional limited liability company) or PCs as opposed just the LLC or the corporation.
So if you’re a professional like a physical therapist or doctor, dentist or lawyer your state may actually require you to set up as this professional corporation as opposed to a regular corporation. So that’s something really important that people need to go and look into their state corporation commission to see whether or not they’re required to set up separate special entities.
Greg: You mentioned a couple of very important things there that I want to follow up on briefly Teresa. First, you mentioned there’s the LLC and the PLLC, both of which you’ve done given your work with The Goody Group and the corresponding law group. So explain how you walk through that process personally.
Teresa: Sure. Because I have a law firm I have a professional limited liability company, and I’m required to in the State of Virginia because I am a lawyer. So only lawyers can be a partner in that specific company and DC and Virginia both require that.
Now for my consulting company that’s not required, and for that I can have a regular limited liability company, and actually I can’t set up a professional limited liability company for that because it’s not an actual profession that allows to set up a professional company. So with the consulting firm it’s just the regular LLC. And for the PLLC there are other requirements, like I have certain professional and malpractice insurance that go along with it.
But in setting up each of those along with picking out which entity you’re going to start with then there are other actual requirements. So if you’re going to get a website you need a domain, and you need to make sure that domain is available. And that often times helps determine what the name of your different entity will be because so many domain names are already taken. So people make slight changes or spell it a bit differently so their domain name can actually match their business name.
Then you might need to trademark it. I didn’t trademark my name but some people do. Then you might need a license. Now for my law company since I’m a lawyer, and I’m already barred and already belong to these different licenses, I have a law license in Virginia and DC that counts as my license. Then for other types of companies you might need a specific business license. Sometimes you do and sometimes you don’t. It will all depend on your state.
Then you have to look at there’s different zoning laws, so I have two offices in Virginia and DC, but if I were to open a home business then I’d have to look into my locality, and look into whether or not I need to apply for a zoning license. Then, of course, there is the insurance.
So those are the general requirements that you go through with your locality and your state to set up your different businesses. Of course then there is the whole start-up process and all the governing documents which we can get into also.
Greg: One of the things you mentioned a couple of times now and I want to make sure our listeners don’t miss is depending on the jurisdiction you’re in, the county, the city, or the state, you could be looking at very different rules. How important is it to investigate that and what should you be looking for?
Teresa: It’s very important because there’s different taxes. For example one locality may require you to pay taxes in that county. So you may have federal state and county taxes for your business. So it’s important that you look into your county and your state to see what the requirements are. And Google is your friend here. Most of this information is available online. Most states will have some sort of small business association seminar that they put on that will be free or very low charge for you to go and learn all of the basic business requirements to set up a business. That’s a very inexpensive way to inform yourself. I think the biggest problem people have when starting their own business, and I see when advising entrepreneurs, is that they don’t take the time to understand all of the requirements beforehand. It’s much better to ask your state and locality for permission than to ask them for forgiveness.
Greg: Excellent advice. And while starting that small business is very exciting, there are important things you need to have in place, particularly when limiting your own personal liability. It’s amazing how quickly the podcast goes, but I don’t want to end without giving you a chance to explain to our listeners what the Goody Group does and what services they might be able to benefit from you.
Teresa: Sure. Thank you. I assist entrepreneurs of all sizes, and help them through all stages of their life cycle. If you’re looking to strip your business or you’re trying to grow, as an MBA and an attorney, I assist with both the strategic and the legal parts of this. I do want to note that I can help with everything in writing. If you’re starting a business, I can assist with that, and make sure that if you’re entering into a business with other people, you want that agreement, that prenuptial agreement. A business is a marriage, and I can help you guys go forward without any kinks, and help you do what it is you want to do without worrying about the legal mumbo jumbo that goes along with it.
Greg: Teresa, fantastic advice, and thank you so much for being with us this week. We really appreciate it.
Teresa: Thank you so much. It was my pleasure.
Greg: Teresa Goody is the founder and CEO of The Goody Group. I’m Greg Corombos.
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