Module 2: Lesson 3 – Forming a Legal Business Structure

Welcome to Lesson 3, where we delve into the crucial process of selecting the right legal structure for your business. Understanding the legal considerations and types of business entities is paramount in laying a solid foundation for your venture. In this lesson, we’ll explore the significance of the various legal structures, provide a brief overview of key business entities, guide you through obtaining an EIN (Employer Identification Number), and initiate a real-world exercise to help you make informed decisions about your business’s legal structure and get it setup so you can start selling your products.

Legal Considerations:

Before we delve into the types of business entities, let’s first understand why choosing the right legal structure is essential. The legal structure you select impacts various aspects of your business, including taxation, liability, and operational flexibility. Different structures offer distinct advantages and disadvantages, so making an informed decision is crucial for the long-term success of your venture.

Before we get into the specifics, it’s important to note that while we are providing valuable insights into the legal considerations of business structures, neither Chris Miller, nor United Business Networks are intending to or licensed to dispense legal advice in this regard. The information presented here serves as a general guide only, and we strongly recommend consulting with a corporate law attorney for personalized advice tailored to your specific circumstances. If you have any legal questions or concerns, seeking professional advice is the best course of action to ensure compliance with applicable laws and regulations.

Types of Business Entities:

Sole Proprietorship:

A business owned and operated by a single individual. It’s the simplest form with the owner having complete control but also being personally liable for business debts. If you choose this type of business structure for your business, be aware that you are held personally responsible for the conduct and liabilities of your business and business practices. If someone reports your business as committing fraud, for example, it is the same as them reporting you personally for committing that fraud.

Additional Note for Sole Proprietorship:

If you are choosing to file as a sole proprietor, you will also need to file a DBA (Doing Business As) or Fictitious Name Certification with the Department of State. This can be done online, but you will be required to obtain proof that you are legally able to use that business name prior to filing. In order to obtain the proof you need for the filing with the State, you will need to have a local newspaper post your intent to use the name as your business name in their classified section and send you a proof of the ad run. Scan that into your computer as a PDF file so that you can upload it to the Department of State website when filing.

Tax filings for this type of business structure are the same as with your personal tax return.

Limited Liability Company (LLC):

Combines the simplicity of a sole proprietorship with the limited liability of a corporation. Owners of an LLC are known as Members, with the one in charge being the Managing Member. With a LLC containing 2 or more members, the law provides some protections from personal liability, and the business has flexibility in management. A single member LLC, on the other hand, is usually treated no different than a Sole Proprietorship under the law. This is especially true in the case of income tax filings.

Tax filings for each member of an LLC are the same as with their personal income tax returns, but with the inclusion of the Schedule C and Schedule K forms as well.

Partnership:

A business owned by two or more people. There are different types, including general partnerships (shared liability) and limited partnerships (one partner has limited liability). This is most likely going to be seen in the case of an LLC type of structure, but that is not always the situation. If you ever see a Corporation that says ,LLP after the title, that stands for limited liability partnership.

Tax rules for this type of structure will go in accordance with the rules of the LLC or Corporation structure they are tied to.

Corporation:

A legal entity completely separate from its owners which are known as shareholders. This type of organization structure provides the most extensive liability protection but involves more complex regulatory requirements at the same time. Regular monthly or quarterly meetings are required to be conducted, recorded, and filed, as well as detailed financial reporting to the shareholders which must be filed quarterly and sent to all shareholders at least annually to inform them of the company’s progress and financial stability.

Tax filings for this type of structure are filed separately from your personal income tax reporting. You will also be required to file a Corporate Income Tax as well.

S Corporation:

The S Corp is more of a designation of a Corporation structure than it is an actual structure of it’s one. When choosing a Corporation structure, you will be asked to choose between an standard C Corp, or and S Corp structure which comes with the benefit of pass-through taxation, meaning profits and losses are passed through to shareholders and reported on their individual tax returns. This type of Corp. structure provides a little tax break if you are a small corporation since you will only be required to file a personal income tax return and not a corporate return as well, as with the standard corporation, or C Corp, structure.

Whichever one appeals most to you, feel free to choose it and file with your Department of State. This can be done on-line, and usually just takes some basic information and less than 15 mins of your time to complete. Most States have guided forms that will walk you through it so there really isn’t a large need to hire an expensive lawyer to file this for you. We have seen on-line lawyers charge up to $3500 to file a Corporation on their client’s behalf, which may be warranted in complex situations, but for the average person starting out in an on-line business, a simple LLC or Sole Proprietor Filing is usually sufficient, and can be done easily on your own.

Understanding the EIN Number and its Necessity:

Once you have filed with your State for your Business License based on the corporate structures we just covered, it’s time to get your business an Employer Identification Number (EIN). The EIN is a unique identifier for your business, similar to a Social Security number. It’s necessary for various reasons, including opening a business bank account, hiring employees, and filing taxes. In this real-world exercise, we’ll guide you through the step-by-step process of obtaining your EIN to ensure you’re on the right track from the start.

IMPORTANT NOTE:

You may file for an EIN on-line and obtain your number immediately. A word of caution, however, would be that you will be able to view your official letter with your EIN one-time only, and we mean one-time. The IRS will never provide it again, nor will they email or re-send a copy of the letter to you. For this reason, it is imperative that before you request an EIN on-line, you make sure that your printer is hooked up and functioning properly so that you can print a hard copy. Our suggestion is to print 2, and also take a screenshot of the letter as well so you have a digital copy. File a hardcopy of the letter in a business documents folder, along with your State and local Business License filings, and any others you may need.

In order to file for your EIN online with the IRS, it is important that you make sure you do not give your personal information to a scam or look-alike site that is not the IRS. There are several of them which pop up first in search engines that have collected personal information from many unsuspecting filers over the years. Remember to look at the url address in the address bar of your browser. The IRS website is IRS.gov. It is not a .org or a .com. Look carefully, and don’t start filling in your personal information in the wrong place.

The correct web address as of the date of this recording to file your EIN online through the IRS website is as follows:

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

Please be sure to read everything on that page carefully before clicking the (Apply online now) button in order to ensure you do not make any filing errors. The process itself is fairly straightforward however.

Understanding Sales Tax and State Filings:

Now that you’ve secured your Employer Identification Number (EIN), it’s time to delve into another critical aspect of business operations—sales tax. Sales tax is a consumption tax levied on goods and services at the point of sale. As a business owner, it’s essential to understand your sales tax obligations and comply with state regulations.

Each state has its own rules and rates for sales tax, and it’s your responsibility to collect and pay the appropriate amount with each month, quarter, or annual filing as required by your State.. Start by determining whether your products or services are subject to sales tax in your state. Certain items such as on-line services may be exempt for example, so familiarize yourself with the specifics relevant to your business.

Filing with the Economic Authority:

To stay in compliance with state regulations, you’ll need to register with the economic authority or tax agency in your state. This registration process varies by state, and you may be required to file periodic sales tax returns, typically on a monthly or quarterly basis.

As a part of your business responsibilities, keep accurate records of all sales transactions, including taxable and exempt sales. Many states provide online platforms for filing sales tax returns and making payments. It’s crucial to meet filing deadlines to avoid penalties and maintain a positive standing with the economic authority.

For personalized guidance on your sales tax obligations and state filings, consider consulting with a tax professional or accountant. They can provide insights tailored to your business activities and ensure that you navigate the complexities of sales tax compliance effectively.

Remember, proactive management of sales tax not only keeps your business in good legal standing but also contributes to the smooth operation of your financial processes. Take the time to understand your state’s sales tax requirements and establish a system that ensures compliance from the start. Our recommendation is to hold the tax collected in a high-yield savings account. Many of them come with a 4% or grater APY which will earn you a bit of cash at the end of the year on money that isn’t actually yours. Since you have to hold it for the Government however, why not make good use of it.

Decision-Making Process:

Selecting the appropriate legal structure involves careful consideration. Factors to weigh include the nature of your business, liability protection, tax implications, and management preferences. We’ll guide you through a decision-making process to help you evaluate these factors and choose the legal structure that aligns with your business goals.

Real-World Exercise:

Now, it’s time to put theory into practice. Begin the process of selecting a legal structure for your business and set it up officially. Follow the step-by-step instructions provided in the exercise to obtain your EIN and make informed decisions about your business’s legal framework.

Activity and Discussion within the Online Community Group Page:

In the online group, share with us which legal structure you decided to choose for your business, and why. Provide feedback and support to at least 3 others in the discussion and help each other out. As you embark on this journey, remember that the legal structure you choose lays the groundwork for your business’s future. Let’s make informed decisions that set the stage for success.