Lesson 5: Business Structures

What You’ll Learn: Choosing the right business structure is one of the most important decisions you can make as you start a business, since it affects your tax liabilities, legal exposure, and potentially, your personal assets. Don’t worry, it’s not as complex as it seems and we’ll take you through the options along with the advantages and disadvantages of each.

Business Structures

“A big business starts small.”

Sir Richard Branson              

Introduction

Before you ever get to the point of hanging an “Open for Business” sign out front, you need to decide what structure your business is going to be. Each has its own advantages and disadvantages related to taxation, liability, insolvency, filings and reporting.

This tutorial is by no means all-inclusive nor do we make any attempt to offer advice or recommendations. Every business is different, as is the owner or operators. As such, you really want to consult with an attorney, mentor or CPA to get a better handle on which structure suits your needs and situation best. An attorney can help you do all the necessary filings to make sure you’ve covered all the bases with city, county, state and federal agencies.

Getting Started

Each business structure has its advantages and disadvantages. Following is a quick overview.

Keep in mind that you’re not stuck with the initial choice you make. Many sole proprietorships have become a partnership, LLC or corporation as the years go by and the needs of the company change. Still, you’ll want to give this some thought as the additional cost and paperwork of changing structures can be time-consuming.

Legal liability. Different structures expose you to different levels of personal and professional liability in the event you are sued or the business becomes insolvent. You will want to factor in your own circumstances when considering the best structure for your new enterprise.

Tax implications. Taxes have to be paid no matter what. The real question is how they are reported and what tax benefits are offered within a particular business structure. Corporations typically get better tax breaks than sole proprietorships or partnerships.

Administration: Corporations require more record-keeping and paperwork compared to other structures, which is why many new business owners choose the sole proprietorship, partnership or limited liability corporation for their structure.

Future needs: It’s a lot easier to purchase a home if you incorporate, as you are considered an employee of the business and as such, have verifiable income in the form of draws and salary. Some lenders are reluctant to lend to a sole proprietorship because the assets of the business and the owner are so tightly interwoven. A corporation can also simplify the transfer of the business to family members and make it easier to raise funds by selling shares of stock.

Regardless of the structure you choose, you will need to follow the same steps to register your business initially. Missing any of these steps or not doing them in the correct order can cause delays. Steps 5 & 6 are industry-specific and won’t apply to all businesses.

Here are the eight steps the state requires to set up and operate a business:

  1. Research and make a plan
  2. Register your business with the Secretary of State (SOS)
  3. License your business with the Department of Revenue (DOR)
  4. Report your new employees to the Department of Social and Health Services (DSHS)
  5. Apply for a Reseller Permit with the Department of Revenue (DOR)
  6. Register as a contractor with Department of Labor & Industries (L&I)
  7. Contact your local health department for food handling requirements
  8. Check with your City and/or County for their requirements

 

Let’s move on to the various structures, starting with the most basic, the Sole Proprietorship.

Your Instructor

Madhu K. Singh is the founder and Chief Legal Officer at Foundry Law Group. Madhu and her team enjoy growing the firm by empowering businesses to get organized and protect their business assets and intellectual property. She currently serves as President of TIE Seattle, a local nonprofit focused on fostering entrepreneurship in the Greater Seattle Area. In addition to her practice, she is in her eighth year as Adjunct Faculty at the Community Development and Entrepreneurship Clinic at Seattle University School of Business/Law. In her spare time, she supervises cohorts of attorneys advising new nonprofits, volunteers as an advisor to local microenterprise clinics and mentors emerging startups in accelerators programs.

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