As of 2017, there are 29.6 million small businesses in the U.S. Chances are, you know or know of someone who is trying to make their dreams come true in the small business sphere. In fact, the US economy grew 2.5% in 2015 and then 1.2% come the second quarter of 2016. What these statistics show is that the US economy is slowly getting back on track; perhaps it is time to take that step and launch that business you’ve been on the fence on? If you are weighing your options, find out what entity is best for your business and why you need to conduct a business name search.
1. Do You Need Financial Backing?
First off, calculate how much you need to get your startup off the ground and running. Do you need money for patent and trademark rights? What about the cost of a website and employees? Not to mention office space, branding, and miscellaneous business expenses that are bound to come up.
If your business requires little to no financial backing, you could register with the Federal Government as a sole proprietorship. Then again, know that while this option initially is less expensive, if you do end up making more money, you will be taxed heavily on it—both from a personal and business standpoint. Meaning, you will have to pay social security and Medicare both as an employee and employer.
If you do need financial backing—either from a venture capitalist or angel investor—it may be in your best interest to file as either a limited liability company (LLC) or (C or S) Corporation. Traditionally speaking, C Corporations normally are the go-to when looking for venture capitalists; however, nowadays, that isn’t always the case. In order to determine if it would be more beneficial to file as an LLC or C or S Corp, consider if eventually you want your business to go public, how much limited liability protection you want, how you want to be taxed, etc.
2. Are You Aware of Taxes?
Not every business entity is taxed equally. As mentioned, sole proprietorships will be taxed as an employee and employer, which can be around the 30% mark. Revenue from an S Corporation will be divided into salary and dividends so self-employment tax will be less. Corporations are taxed on a personal and corporate level—in other words, double taxation. And, depending on how the LLC is formed—whether it is a corporation or partnership—will determine its tax status.
3. What Are Your Future Business Plans?
Do you plan on hiring more employees? What about going public? What are your profit goals? It is important that you create a business plan that takes future growth into consideration. (In fact, you may want to re-evaluate your business plan at least every 6 months to track your progress and plan next steps.)
Depending on your goals, you may want to start out as a sole proprietorship and then when you reach your profit goals, transition to an S Corporation to bypass the high self-employment taxes. Or perhaps, your goal is to go public in which it would be more beneficial to transition to a C Corporation.
4. Do You Want to Go Public?
Traditionally, going public was the marker of business success. However, not so much anymore. If this is your goal, as mentioned, transitioning to a C Corporation may be your best bet. If going public is not at the top of your list, look at the other pros and cons that come with a C Corporation—such as double taxation, mandatory meetings and record keeping, etc.
5. Can You Support Your Employees?
According to Forbes, small businesses have driven 65% net new jobs since 1995. This shows that contrary to popular belief, small businesses make up a large part of the hiring force. The question is not whether you can hire employees but do you have the financial means to support them?
Can you provide financial bonuses to reward above-average work and incentivize strong performance? Do you have the financial capacity to pay for employee benefits such as healthcare? Are you so immersed in your business that you cannot give employees recognition and praise? Do you expect employees to be reachable at all hours throughout the week?
In fact, according to a survey, 45% of employees reported that they don’t have enough time to spend on personal activities during the week. Having the expectation that employees should be reachable may lead to a high turnover. Needless to say, if you find yourself treading water, you may not be at a place where you can offer employees consistent job satisfaction.
In this sense, it may be best to focus on growing as a sole proprietorship, transition to either an LLC or corporation, and then, after the transition, hire (and support) employees.
6. How Likely Are You to Be Sued?
Forbes estimates that 90% of (large and small) businesses are involved in a suit at any given moment. What this means is that, chances are, you are going to get sued. That said, there are industries which have a higher chance than others, with oncologists and urologists being some of highest positions in the medical field to get sued.
That said, it may be in your benefit to consider business entities other than sole proprietorships and partnerships which offer limited liability benefits. That way, if you are sued, unless the corporate veil is pierced, plaintiffs can’t go after your personal assets (if you did not list them as collateral).
No matter what, each state has their own business laws and regulations. While it could be in your best interest to register as a sole proprietorship in one state, in another there could several disadvantages. Do your research and make sure to conduct a business name search. Also, we advise that you talk with a reputable and licensed attorney and/or accountant to get a better perspective on your business options.