Choosing a Legal Structure

Now that you have decided you want to start your own business, it’s time to decide which legal structure best suits your needs. The structure you choose can have different tax and liability implications, so it is important to choose carefully. While you should always seek professional tax and legal advice before making any final decision, below is a simple comparison of the most common legal structures for small businesses.

Sole Proprietorship

Pros
– Easy to form
– Complete control under 1 owner
– Automatic designation if you are operating without obtaining licenses or permits

Cons
– Business liabilities are not separated from personal assets
– Not ideal for moderate or high-risk businesses
– Difficult to find banks/investors willing to lend money

Partnership

Pros
– Similar to sole proprietorship, but allows two or more owners
– Owners can structure the partnership to meet their needs through a partnership agreement
– Limited partnerships can protect the partners from the actions of the other partners

Cons
– One partner may have full liability for the company, but also full control
– Other partners may only be limitedly liable, but also only have limited control
– If not formed correctly, partners can become liable for the actions of the other partners

Limited Liability Company (LLC)

Pros
– Combines benefits of Corporations and partnerships
– Personal assets are protected
– Profits passed easily to personal income without corporation tax liability

Cons
– Term of the LLC may be limited by state law
– More difficult to form
– More complicated tax filing

Corporation

Pros
– Can have multiple shareholders
– Full protection of personal assets
– Different types to suit your business model
– Easy to raise business capital by selling stocks or shares

Cons
– May be subject to higher taxes
– Strict formation requirements, including bylaws and mandatory annual meetings
– May be subject to double taxation

Non-Profit/Cooperatives

Pros
– Organized to provide charity or other public benefits
– Eligible for grants and donations
– Provides tax exemptions
– Protects personal assets from liability

Cons
– More complicated to form
– Strict government oversight and auditing
– Special regulations cover how income may be used

Securing Licenses and Permits*

Once you have chosen the best legal structure for your business, you need to file for the correct licenses and permits before you begin operation. All businesses, even sole proprietorships operating under your own name requires some type of license. Luckily, you can easily prepare and file most forms online. Below are the common licenses and permits your new business requires.

General business license.

Almost all businesses require some type of general business license, which can be obtained from your city’s website.

“Doing business as” (DBA) license or permit.

If you’ll be running your business under a fictitious business name, you will need to file for a DBA permit through your county clerk’s office. Generally, you will need to run a newspaper ad running your proposed DBA name. Before filing for a DBA, it is a good idea to do a search for your business name on the Secretary of State’s website.

Federal tax identification number.

Most businesses will have to apply for a federal EIN, or employer identification number, also known as a tax identification number. Sole Proprietors may use their social security number instead.

Sales tax permit.

If you plan on selling goods, you are required to obtain a seller’s permit from the State Board of Equalization. This permit will allow you to collect and pay sales tax on your goods.

Home occupation permit.

If you operate your business from your home, you may be required to obtain a home occupation permit from your city or county.

Health permits.

Certain business may require health permits before operations. The most common types of businesses that require health permits are restaurants, catering companies, tattoo parlors, salons, and flea markets.

Fire department permits.

If your business involves the use of flammable materials, you likely require a fire department permit before beginning operations. Obtaining the permit will require an inspection by your local fire department.

Special federal licenses and permits.

Your business may also require additional licenses or permits if your business involves activities regulated by the federal government, such as alcohol, firearms or wildlife-related activities.

^{*This list of license and permit examples may or may not apply to your business. Consult your local and state governments, and small business associations to determine the licenses and permits required for your type of business and its location.}