Business How-To

How to Form Your New ESD Business

United States Edition

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To Incorporate or Not To Incorporate

One of the first decisions you’ll need to make when starting your ESD business, assuming it will be a for-profit business, is whether or not to incorporate. One of the best reasons to incorporate is to protect your personal assets (money in the bank, a home, other properties, investments, and other valuables), though incorporation is not the only way to do this. Incorporating is relatively inexpensive and, if you keep your personal funds separate from your business funds, your personal assets will be protected from business-related creditors and lawsuits.

If you decide not to incorporate, you will be operating as a sole proprietorship or, if you have a partner, as a partnership. (Note that sole proprietorships and partnerships are the same, for all intents and purposes, in terms of structure and tax classification. The biggest difference is that a sole proprietorship is run by one person, a partnership by more than one person, and each have their own tax forms.) If you will not be incorporating and wish to operate your business under any name other than the legal name of your unincorporated business (your name), you’ll need to create a DBA. DBA stands for “doing business as” and is also called a fictitious, assumed, or trade name. Let’s say your name is Maria Perez and you want to start an ESD business called Perez Empowerment Self-Defense. You’ll need to first search for the name you’d like (we recommend doing this search in your state, county, and city) and then file a DBA form, usually with your county or state. Then choose a website name (a URL) and conduct a URL search to ensure that your preferred URL is not already taken.

What About Becoming an LLC?

The first thing to know is that forming an LLC is something you can do whether or not you incorporate. The second thing to know about LLCs is that they do not determine how your business is taxed by the IRS. Taxes are determined by whether or not your business functions as an entity separate from you. In the case of sole proprietorships, for instance, you and the business are the same entity for tax and liability purposes. In the case of LLCs, the LLC is considered a “disregarded entity,” which sounds insulting but really just means that an LLC is a separate legal entity regulated by state law and that the IRS disregards that distinction for tax purposes (the IRS taxes LLCs the way it taxes sole proprietorships and partnerships). Finally, LLCs are afforded the same liability protections enjoyed by corporations—personal assets are protected from business creditors and lawsuits.

How Do I Choose?

There are a few things to consider when deciding whether to form and classify your business as a sole proprietorship or partnership, an S corporation, or an LLC. In weighing tax considerations, you will need to think about state tax rules as well as IRS federal tax rules. Here are some questions to mull over.

How important is it to you that . . .

  • Your personal assets are protected from your business’s liabilities?

  • You receive favorable tax treatment?

  • The process of creating your business is as easy and quick as possible?

  • The process of running your business is as easy and quick as possible?

  • You keep startup and ongoing fees to a minimum?