Forming a Business: A Short Primer

Let's get down to business

Li Shang from Mulan. Only tangentially relevant.

Disclaimer: I am not a lawyer. This post is merely the findings of my personal research online, and may have inaccuracies. If you need legal advice, you should consult a lawyer or attorney.

I’ve been doing a fair bit of research lately on what goes into forming a business and what the different business types are. Unfortunately, details vary from state to state in the USA, so you’ll have to look into details yourself no matter what. If you’re outside of the USA, it’s possible none of this will be relevant to you.

Do your research. The goal of this post is to help you make sense of things in a sea of legalese and governmental websites. It is not meant to be your only source of information.

With that out of the way, here’s a quick, plain English business primer for anyone looking to form a start-up or do contract work!

Why form a business?

Generally speaking, you can actually do business as an individual and not go through the process of legally forming a business. However, there are a number of advantages to forming one:

  1. You can do business under the business’s name. You’re required to use your legal name when doing business. This lets you put down a business name rather than your legal name everywhere.
  2. You can get an Employer Identification Number (EIN). Without an EIN, you’ll end up having to use your Social Security Number on any tax-related paperwork, including things with other companies, not just the government. (Note: You may be able to get this as an individual, but I’m not sure. I haven’t looked into it.)
  3. You may be protected legally from company debts. This will vary depending on what type of business you form. For some business types, only the business is liable for any debts or legal issues. This means that if your company goes under, or gets sued for a lot of money, they can’t take your house or other personal assets to cover the rest of the debts.
  4. You have an entity to assign ownership to. Generally speaking, people own whatever they work on unless they sign a contract stating otherwise. With a business, you can create work for hire agreements that assign ownership any work on a product to the business.

There are, of course, other details to consider, but those are the primary reasons you’ll want to form a business.

What types of businesses are there?

This varies by state in the USA, though there are similarities. For New York State, you can use this reference on the Department of State’s website for more information.

In a nutshell, your options in New York are:

  • Sole Proprietorship: A business that consists solely of yourself. The only (optional) paperwork is filing for the name you would like to legally work under, if you do not want to use your legal name. You’re not protected legally from any liability, and all taxes are done on your personal tax return.
  • Partnership: Same idea as a Sole Proprietorship, but for multiple people. You need to file a business name to legally work under. You’re not protected legally from liability, and all taxes are still done on personal tax returns.
  • Limited Liability Company (LLC): A flexible company that can be structured however you would like. Members are legally protected from liability/debts of the business. An LLC chooses from a few different options for how it should be taxed.
  • Business Corporation: A “traditional” company that has shareholders, etc. Shareholders are legally protected from liability/debts. A corporation pays state franchise taxes and taxes on income; shareholders pay taxes on income distributed as dividends.

I’ve left out not-for-profit corporations for the sake of simplicity and because I don’t know much about them. If you’re outside New York, things are going to vary; try and find the website for your state’s appropriate department.

Which business type do I choose?

This really comes down to your personal situation. Strongly consider consulting a lawyer. That said, in New York an LLC or Business Corporation are the only ones that shield you from any debts held by the company, and thus are probably the ones you should consider for anything non-trivial. If you’re doing something simple and low-risk, e.g. just selling home-made things on Etsy as a hobby, you may favor a Sole Proprietorship or a Partnership for the simplicity.

If you’ve done the research yourself and you’re still not sure, consult a lawyer! They will know the ins and outs a lot more than someone like me who merely spent a few hours crawling a few websites trying to figure things out. Yes, it’s expensive, but it’s not worth risking your business over.

Where do I look for more information?

In the USA, you’ll need to find the information relative to the state you’re forming your business in. In New York, that’s the New York Department of State, Division of Corporations, State Records & UCC. For other states, try searching for your state’s relevant department. You’ll also want to check out the IRS’s website for taxation-related concerns.

Any other advice?

To reiterate what I said at the beginning: Do your research. This post is not meant to be your only source of information.

Have I mentioned that you’ll quite likely want to consult a lawyer and not just blog posts online? Because you should really, really consider it.

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