If you co-own a business, consider forming a partnership. With a partnership, profits and losses pass through to the personal tax returns of the partners (so the partnership itself isn’t taxed). When forming a partnership, you have two options:
Limited partnership (LP) has one general partner with unlimited liability, who has more control in the business and must pay self-employment tax, and one or more partners with limited liability and control, who aren’t required to pay self-employment tax, as specified in the partnership agreement.
Limited liability partnership (LLP) is similar to an LP but provides limited liability to all partners.
Limited liability company
An LLC offers two key benefits:
Protection against personal liability that would otherwise expose your personal assets to risk.
Pass-through of profits and losses to your personal income tax return so that the LLC itself isn’t subject to corporate taxes. Members of an LLC, however, like sole proprietors, are considered to be self-employed and are subject to self-employment taxes (Social Security and Medicare).
If you have significant personal assets and are doing any risky business (anything that could expose you to costly lawsuits or bankruptcy), I encourage you to do business as an LLC or as an S or C corporation, which are covered next.
C corporation
A C corporation (C corp for short) is separate from the owners and operators of the business and is subject to corporate taxes. Corporate taxation is a form of double taxation; your corporation pays taxes on its profit, and then you pay taxes on capital gains paid to you as a shareholder of the corporation. A C corp provides the strongest protections against the loss of an owner’s personal assets in the event of bankruptcy or lawsuits.
One of the big benefits of a C corp is that it can raise funds by selling shares to investors. The big drawbacks are the costs and complexity of forming and managing a C corp. Although this option can be the best choice for large organizations, smaller organizations will probably want to steer clear of it.
S corporation
An S corporation (S corp for short) is a simplified version of a C corp with lower costs to set up and manage. As such, it’s more attractive to smaller organizations. With an S corp, profits pass through the corporation to the owners, so it’s not susceptible to double taxation.
Another key benefit is that as an owner, you can receive money from the corporation as employee pay or as dividends paid to investors. The money you take out in pay is subject to income tax and self-employment tax, whereas the money you receive in distributions is taxed at capital-gains rates (typically lower than income tax rates) and isn’t subject to self-employment tax.
One important disadvantage of an S corp, compared with a C corp, is that an S corp can sell only up to 100 shares, which limits its ability to raise capital for growth by selling shares to investors.
Registering your business
Registering a business simply means establishing it as a bona fide entity with state and local licensing and taxing authorities. If you’re creating a personal brand as a sole proprietorship, registering may not be necessary (depending on the jurisdiction and nature of your business), but if you’re operating as a corporation, your business must be registered.
Registering a business name
When you form a corporation or LLC, you choose a business name other than your name as part of the process. If you’re operating your business as a sole proprietorship, you have the option of using your name as the business name or choosing a DBA name.
A DBA doesn’t confer any legal protections, but it enables you to operate under an assumed name, which may be advantageous for branding purposes. Another benefit is that when you have both a DBA and EIN, most banks will allow you to open a separate business bank account and are more likely to consider lending you money for your business.
Registering with taxing authorities
If you operate as a sole proprietorship, you’ll use your Social Security number to pay federal, state, and local taxes. If you form a corporation or create a DBA, you register your business under a separate name and can then apply for an EIN to use when you pay your taxes or withhold and pay taxes for employees.
Getting a license (or not)
Depending on the location and nature of your business, you may need to be licensed to conduct business in a certain jurisdiction. Rules vary among states, counties, and municipalities. In most states, freelancers such as writers, editors, and graphic artists don’t need a license to do business, but if you plan on opening a restaurant or bricks-and-mortar retail store, or if you’re a building contractor or insurance agent, you’ll need a license. Again, check with your local SBA or secretary of state to determine licensing requirements.
Getting a trademark, patent, or copyright
If you’re creating something unique, you need to do more than register your business; you also need to register your ideas to protect your intellectual-property rights. Depending on what your “something unique” is, obtain a copyright (for books and other publications), patent (for inventions), or trademark (for a business or brand name, logo, or design). You may need all three.
You can trademark, patent, or copyright your intellectual property yourself through the U.S. Patent and Trademark Office (https://www.uspto.gov/trademarks) or hire an attorney to do the job for you. You can find plenty of law firms online that offer intellectual-property legal services. Just search the web for “how to” followed by “trademark,” “patent,” or “copyright” to pull up a list.
Financing Your Business/Brand
Depending on the business/brand you’re building and launching, you may be able to work with on a shoestring budget of your own money, or you may need to find additional sources of cash. If you’re creating a personal brand to promote yourself as the world’s leading expert on raising chickens, you can probably do that (or at least start) with a website, blog, and podcast, which don’t require much money. By contrast, if you’re aiming to create your own clothing line or build an international dog-grooming