Our Government Name: How To Structure A Small Business
Starting Hellebore has been a journey full of learning curves, excitement, and opportunity. After we chose the name, we then had to decide on the business structure; in other words, what letters would officially be at the end of our name? This was a crucial question since the entity we chose for Hellebore would impact everything from taxes and liability to daily operations. To analyze our options, we investigated the most common business structures and weighed their pros and cons.
Sole Proprietorship
For entrepreneurs, a sole proprietorship is perhaps the easiest and most common entity to file as. It's simple and inexpensive to set up, you have complete control of the business, and there are minimal tax filing requirements. An important note: if your business is operating under a name other than your legal one, you must file for a Doing Business As name (DBA), which costs around fifty dollars. Although fairly straightforward, this entity does include an element of vulnerability in that there is no separation between yourself and your business, meaning your assets can be liable for seizure in the event of legal action from your client.
Since Hellebore is a multi-partner endeavor, sole proprietorship wouldn't have worked for us, but it's a great option for entrepreneurs starting out by themselves.
Partnership
This brings us to partnerships, which is an option for people going into business with one or more partners. With this type of entity, there are two main types: general partnerships and limited partnerships (LPs). In a general partnership, all partners share responsibility equally and typically don't have to file with the secretary of state, while in an LP, one partner can limit their liability but the company would have to register with the secretary of state. Partnerships are easy to establish and have the unique quality of their profits only being taxed on personal income. Like in a sole proprietorship, if a partnership operates under a name that is not the full legal name of each partner, it may need to register a DBA.
LLC
An option similar to partnerships but with added protection is an LLC. This combines the simplicity of a sole proprietorship or partnership with the liability protection of a corporation. In an LLC, personal assets are kept separate from the business and cannot be seized and profits are only taxed based on personal income. This is the option we decided on since it's the most straightforward and popular for small businesses.
Since there can be the potential for disputes with so many partners, we drew up an operating agreement. This is a legal document which outlines things such as how to approach disagreements, how to designate a tiebreaker, or how to handle one of the founders choosing to part ways with the company. Creating an LLC necessitated filing with the secretary of state, filing for an tax identification number (EIN), and establishing a separate business bank account.
S Corp
One final structure we looked into was an S corporation, a more complex model but one that can offer advantages if your business plans to raise capital or issue stock. We found that an S corp provides strong liability protection and significant tax benefits, but that it had higher setup and maintenance costs, along with corporate formalities such as annual meetings and meticulous record-keeping due to having much closer IRS scrutiny than an LLC because of their different tax reporting requirements.
Conclusion
Ultimately, choosing a business structure depends on your specific business goals, your knowledge and confidence with tax law, and your financial situation. We felt confident moving forward as an LLC due to its level of protection for us and our business and its fairly straightforward setup. Now, our government name is officially “Hellebore Literary Agency LLC.” ✿
