CREATE A BUSINESS ENTITY
There's a Reason Successful People Own or Control a Corportion or LLC. It Is the Same Reason You Should
Create a Business Entity.
Virtually everyone who is successful in business will create a business entity at
some point. Why? Because creating a corporation, LLC, or other legal entity allows you to keep more of
your money. That is the bottom line.
Government grants special deductions to business entities that it doesn't grant to
individual humans. So, to maximize the amount of money you get to keep, and minimize the amount that you have
to fork over in taxes, you need to create a business entity at some point.
It does cost money to do this. It may cost time and money if you don't pay an
attorney to do it for you. You also may not be ready to create a business entity at this moment because you
simply can't afford to do so. Even if you can't afford it, be thinking about it.
Create a Business Entity: Who?
Every business owner should create some form of business entity.
Eventually, you will be throwing money away if you don't create a business entity
and operate your business through it. The financial flexibility gained through use of a corporation or LLC,
and the money saved through reduced taxation, makes the decision to form one a no-brainer. Deciding when to
do it may be more difficult.
Create a Business Entity: When?
Ideally, you should create
a business entity as soon as you can. If you have the means to do it, do it. There are expenses
associated with forming a corporation or LLC, so you do need to consider when prudence directs the formation of
Only the bold should
create a business entity before taking any other concrete steps to ensure your business is viable. For
website or blog businesses, it may be a good idea to wait until the development
By waiting until
the Website Development phase, you haven't
lost much (if anything) other than the time you have spent developing your niche concept. By that time, you
should have your niche and site concept ready, and you will likely be at the point where you may start incurring
expenses that can be tax-deducted if you have created a business
That is why this section
is where it is on this website. The next step (Website Development) can have expenses associated with
it. Even though they may not be outrageous, it is still better to be able to deduct them from your taxes,
after consulting with your CPA or other tax
Create a Business Entity: Why?
There are three main reasons why you should consider
creating a business entity.
The first reason: we live in a country where lawsuits
are as common as grass. Forming a business entity, particularly a corporation or LLC, creates something
called a "corporate veil." The corporate veil is an invisible legal barrier between the business and you as
If you start a business without creating a business
entity to take care of everything related to the business, you set yourself up for total loss if you ever get sued
and lose. By creating a corporate veil through a business entity, you create a legal separation between your
individual assets and your personal assets.
In other words, you protect yourself. If your
business causes damage to someone, or if it is sued becasue it sold coffee to someone who then spilled it on
themselves, you may lose the case. If the reparations are, say, ten million dollars, you may not be able to
pay it. If that were to happen, your business may have to declare bankruptcy, but everything you own
personally would likely be safe and "untouchable."
However, if you don't form a business entity and don't
have a legal barrier separating you from your business, you are at risk. If your business got sued (and
lost), everything you own can (and probably would) be taken. Your house, your cars, whatever you own would
likely be liquidated to make recompense to the
Don't let this happen to you! You would be wise
indeed to form a business entity. Should you be sued, you should at least have the peace of mind knowing your
personal assets are separated from your business assets by the corporate
The second reason: taxes. As mentioned above,
creating a business entity is a key step in minimizing your tax burden. Businesses that are legally
structured as a business entity are able to legally retain more money than those that aren't. Again, talk to
your CPA. You have begun to Develop a Business Team,
The third reason: financial flexibility. Not only
do you pay less taxes, but owning a business that is structured as a corporation or LLC opens up worlds of
opportunities to a successful entrepreneur.
Why create a business entity? To protect yourself,
to keep more of your hard-earned money, and to open doors financially that would otherwise be closed to you.
There are other reasons, of course, but those are the top
Create a Business Entity: Which?
There are five main types
of business entities: Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Partnership,
Corporation, and Limited Liability Company.
There are advantages and
disadvantages to each type of business entity. However, the disadvantages outweigh the advantages for
Depending on the specifics
of your situation, it is highly likely that forming a Limited Liability Company or incorporating is the
best option for you.
I chose to form an
LLC over a corporation for several reasons. The LLC allows me to keep the flexibility of pass-through
tax status while providing the liability protection I think everyone should have. Additionally, there are
fewer maintenance requirements for the LLC. And, they are relatively easy to
I recommend every
business owner create a business entity. The vast majority of those people will be best
served by either forming a Corporation or Limited Liability
Create a Business
There is a lot of hype about where you should incorporate or
which state should be home to your LLC. There are some legitimate things to consider about different
However, the best option for the vast majority of people is to
create their business entity in the state where they live. If you plan on doing any sort of physical
transactions through your business entity, the costs will ramp up if you form your entity outside the state
where you reside.
You will likely have to foreign file in the state where you live
in order to legally do business there as a business entity. This cost varies from state to state and is
quite expensive in some states. You'll also likely have to maintain a registered agent in the state where
the business entity legally resides (if different from your own personal residence). That costs money,
too. Most people will be better off if they create their entity in the state where they live.
With that said, there are several potential benefits to
incorporating in a few special states. You may have heard radio commercials encouraging people to
incorporate in Nevada or Deleware. The reason is that those two states have very favorable laws regarding
business entities created therein. Additionally, for individuals seeking extreme privacy, it is possible
to essentially complete anonymity if one forms an LLC in New Mexico.
For my own Limited Liability Company, I chose to form in
Nevada. Nevada, undoubtedly, has the strongest corporate veil of any state. As long as your business
is honest, a lawsuit involving your business should be completely isolated from your personal assets.
Additionally, the tax benefits are excellent as well.
Create a Business Entity: How?
There are three main ways to create a business entity. You
can do it yourself. You can use specialty services to form it for you. You can pay a lawyer or CPA
big bucks to do it on your behalf.
Each of these methods have pros and cons. If you do it
yourself, you better know what you are doing and not miss any step. Doing so will likely "pierce" the
corporate veil you are trying to establish for liability protection and result in your personal assets being
placed at risk.
If you use a specialty service, they will likely ensure that
everything is taken care of at a reasonable price.
If you pay a lawyer or CPA, you'll likely get things done
correctly also, but at a higher overall price. It can be a benefit, however, to have a personal
relationship with a professional in the area. Both a Corporation and LLC require maintenance, and it can
be very helpful indeed to have a local person with whom you may consult.
I used a specialty service. Specifically, the Corporate Service Center. They have done and continue to do a tremendous job.
They will answer your questions free of charge and help you every step of the way.
Create a Business Entity: Conclusion
You can file the papers yourself, use a
service to get you up and running, or pay a lawyer. Each option will get you to the same end result.
But, for the protection and benefits that come when you create a business entity, you should definitely consider
Keep reading! Here is some Miscellaneous Guidance that will serve you well.
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