Many times when people start a part-time business (especially the home-based variety), they don’t take the time to properly structure their efforts as a legal business entity. There are many reasons that this happens. For some, their business isn’t making money so they don’t really see a need to go spend the extra money and time dealing with the legalities and would rather just keep everything in their own name for the time being. For others, they may not know the possible advantages and disadvantages of each business structure, and just concentrate on their day to day business activities. Whatever your reason, it’s in your best interest to look at the possible benefits you could reap by taking the time to set up your business as it’s own legal entity.
Protect your assets
The number one reason to set up a legal entity for your business is that it can help to protect your assets. If you set up something like a LLC (limited liability company) or corporation, you are separating “you” from “your business”. This means that if anything happened your personal assets would be (most likely) protected. For instance, let’s say that you own a rental property and a tenant wants to sue because they were hurt on your property. Your personal assets (like your house and your car) would be protected since “you” don’t own the property, “your business” does. On the same token, if someone was actually suing you for personal misconduct, your business assets would most likely be protected as well. Above all the rest, this reason alone is worth the cost of setting something up.
Separate your personal and business finances
Another big plus of setting up your business as it’s own legal entity is that you can separate your personal and business finances a lot easier. You will be able to get business banks accounts (and credit accounts) in your business’ name instead of yours. This will allow you to easier track your expenses and earnings, not to mention give your business a more professional appeal and operating environment. Mixing your personal and business finances is something that you really shouldn’t do, and separating them can be very beneficial to your ability to analyze your progress.
Have your own federal tax ID
If you’ve been doing some business up to this point, you probably notice that it takes a social security number to sign up for just about anything related to your business. One advantage of setting up your own legal entity is that the entity can have it’s own federal tax ID (also called an EIN, employer ID number). Now you can use that for anything that requires a federal ID, instead of your social security number.
Tax implications
Being that your business is it’s own legal entity, that means that (for the most part) it’s a tax entity as well. There are many different scenarios and the tax law can be very complex (well beyond the scope of this article, not to mention my understanding), but basically you get some flexibility when you have a business entity.
So you say that you don’t have the money to do it? Well, websites like LegalZoom are helping small business owners achieve their legal needs a lot cheaper than normal. I am in the process right now of doing this same thing, and I am planning to use LegalZoom. When I do I’ll make sure to post a review so you all can see how it works.
In the end, setting your business up legally can just flat-out make it seem more like a business. The more you separate your finances and interests (and definitely assets), the more business-minded you will become, and the more serious you will take your business. Not to mention the image it portrays to potential customers or investors. It shows them that you are serious about what you’re doing, and that you’re not just someone trying out a hobby. Make sure you get some good legal and tax advice from a CPA or tax attorney, and get started on structuring your business for success.
