Beginners Guide to Business Structures

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Many of us are setting up our own businesses. New ideas are being transformed into reality every day. Optimism is abundant, and just when things are starting to look up, you get to that last item on your checklist: “Choose Business Structure”.

Don’t fret! Choosing your business structure doesn’t have to be a scary thing. Just remember these three key tips:

  1. You can just call your Secretary of State. The people on the other end of the call understand that which perplexes you. Just ask.
  2. Still afraid and in doubt? Hire a lawyer. It not necessary, but it will provide you with well compensated relief, and peace of mind.
  3. Every state is going to have different regulations, requirements, and fees. It’s not you, it’s actually just confusing.

So in a nutshell, here’s what we’re dealing with:

1. Proprietorship:

This form does not require any licensing, is free to begin, has minimal accountability to the government, and comes with complete personal liability. If a proprietor is sued, they can not only lose wealth incurred from the business, but personal wealth assets as well.

New artists with little income would choose this option. Getting a business license can be costly, and may require legal guidance.

2. Partnership:

This option has more tax responsibility on each partner than a proprietorship, generally has limited liability exposure, each partner can act as the whole, and each partner is responsible if the whole comes into legal trouble.

This option is common with music groups.

3. Corporation

This option is more formal than the others. It requires registration with the secretary of the state, may require the assistance of a lawyer, and is government regulated. A corporation is its own entity separate from its shareholders, and thus has liability limited to the company’s revenue versus each individual being liable. Artists can still be sued, but corporations provide much more protection than the other options.

This would be an option for an established artist, because it offers more protection, but is expensive and difficult to establish.

4. Limited Liability Company (LLC)

Similar to a corporation, an LLC offers protection from personal liability, and must be registered with the secretary of the state, but is much more affordable. Unlike a corporation, LLCs require taxation through personal taxes, and in some states can be made of only one member. It is not its own entity.

5. Limited Liability Partnership (LLP)

LLPs are exactly identical to LLCs in every way except one; they require more than one member.

A LLC/LLP would be an ideal choice for any artist that can afford it. It offers protection with less legal complexities.

There are many other options; this list is nowhere near exhaustive. This article is not meant to provide legal advice, and you should consult a lawyer for such. You can also find more information at http://www.sba.gov/, the U.S. Small Business Administration.

 

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