Jul 02, 2014: One of the best things a person can do to get on the path toward financial independence and early retirement is to start a business. There is simply no limit to what you can do as an entrepreneur. Whether you are an inventor of a product or the creator of a service, entrepreneurship is one path to enormous wealth. One of the most important steps to take in the early phases of starting a business is to form your business entity.Don’t panic.This step is not as daunting as it sounds.Although the media is fond of using the word “corporation” to describe pinstriped, cheating fat cats, I'd like to point out that not all corporations are morally-bankrupt behemoths. I run a corporation, myself. I created it to pursue all my little entrepreneurial projects, as part of my FIRE plan. The formation of a corporation helps me keep my business and personal lives separate. And it's not that hard. In fact, if you own anything of value, you may want to consider incorporating.
A corporation is a company that exists as a separate entity from its owner. Basically, this means that a business owner is personally protected from the liabilities of his company. All the assets and liabilities associated with doing business are sheltered inside your corporation – effectively isolating you from any bad luck that might befall your little company.In case you do not have an advanced business degree, you can hire an accountant to do the filing for you. With the Internet, though, it is so easy to research exactly what bases you must cover in the formation of your entity. Different entities provide different benefits (and different drawbacks), so it is important to be clear about your goals. Do you want to improve the credibility of your business? Are you trying to lower your self-employment tax bill? Are you forming alone or with partners? Do you intend to sell stock? In what industry will you be working? In which state (or country) will you be conducting the majority of your business?
I would recommend doing a little independent research to choose the best entity for your particular case.Here are some basic points to consider:
- Sole proprietorships and partnerships are businesses that have chosen not to legally form and entity. There are no filing requirements for them. I do not recommend using either of these structures, because neither offers a corporate veil to protect its owners from company liabilities.
- “C” corporations and “S” corporations require the most clerical work, including separate tax filings for the individual and for the entity.
- Limited liability companies (LLCs) are entities that share many of the advantages of corporations (i.e. limited personal liability) with the personal tax benefits of sole proprietorships.
- Non-profits are separate from all others, but can only be used in certain limited cases.
I am not an accountant or an attorney, and my professional recommendation is that you contact both to assist you in the formation of an entity. If you choose to move forward without professional advice, you might consider using incorporation services provided by companies like The Company Corporation or Legal Zoom. Although their fees are added on top of state and federal filings, their expertise will save you time and effort at an expense far lower than those of your local attorney’s office.In my experience, you can expect to spend between $500 and $1,000 forming a business entity, depending on your state and other variables. I recognize that this is a significant outlay for most people, but it is tiny compared to a lawsuit. The tax benefits and liability protection are worth the expense. I wish you luck in your new business!
About the Author
This post has been written for FIRE Finance by Skyler Reep.Skyler Reep is the 25-year-old entrepreneur behind PEER Enterprises, LLC. Early projects included web services and widgets like his cash dimensions calculator, but most of his recent effort has gone into the research and writing of his first book, Luck-Struck: How to Take Control & Create Your Own Luck. He is lucky enough to live and work in the shadow of the Tetons in beautiful Jackson, Wyoming.
Image Source(s): iStockPhoto
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