What type of business should you open?
“Should I open my business as a LLC or a sole proprietorship?” New entrepreneurs often ask about the pros and cons to each entity when they’re just getting started. While there are no set rules to forming a sole proprietorship or LLC, I will lay out the basics to help you decide whether to incorporate. Here are some questions you should ask to find out which will work best for your company:
- Is this a business I plan to operate for 3 years or more?
- Do I plan to hire employees or contractors?
- Am I opening a retail or office location?
If you answered, “YES” to any of the above questions, I would recommend the single member LLC status. Running a business long-term will open it up to greater profit and potential liabilities that you wouldn’t want your personal assets to be on the hook for. When hiring staff, other potential hazards could place you at risk without a separate business structure. When opening a business location (outside of your home office) a limited liability company is the best route, this could protect you if a customer or employee were to, let’s say, trip and fall on the wet floor and sue – even if there is a sign.
If you answered, “NO” to all of the questions above I would suggest you run your new business as a sole proprietorship. The primary advantage of choosing this structure is the low cost and simple start-up. Many states require no separate registration paperwork (unless you want to operate under something different than your name, called a DBA). Plus, you can always switch or convert to an LLC later on down the road and the transition is fairly simple. Note: you can not be a sole proprietor if you have business partners who also own a portion of the business.
Both structures allow your business to be “official,” however there are many other factors that could contribute to your decision to open an LLC, such as the risks associated with the type of industry you’re involved with. As a general rule, the more complex your business, the more likely you should open a limited liability company.