What kind of business structure makes sense when starting a business?

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(if you can’t see the video, go to this link on YouTube)

I have been lucky enough to have been locked away in my office for the last two days with Kyle Durand, my good friend and seriously fierce business adviser.

Kyle is an attorney and a lifelong entrepreneur, and has a special interest in streamlined and efficient business models. He has a post-doctorate in tax law, which makes it hard to find a question that he cannot answer.

We spent our time looking at the lifecycle of businesses from “idea as a glimmer in someone’s eye” to exiting a company. And we analyzed all the different structures, systems and protections business owners need to both reduce risk, reduce stress and maximize growth.

While I wish I could have captured video of many of our discussions, I wanted to take the opportunity of having Kyle here to answer a common question of many new business owners: what kind of business structure should I choose when I start my company? I also took advantage of a beautiful day and shot the video outside (with Kyle’s iPhone) so that if your eyes glazed over if we got too technical, you would still see some natural beauty (Red Mountain is in the background, in Mesa, Arizona)

The types Kyle discussed were:

  • Sole Proprietor
  • Partnership
  • LLC
  • S Corp
  • C Corp

(Apologies to my non-U.S. readers, as obviously these are U.S.-based structures.)

You can connect with Kyle over at Art of Business, or on Twitter at @kpdurand. If you jump on his newsletter list, he will send periodic tips for streamlining and protecting your business, as well as notices of when he does free calls to answer business set up and and tax questions.

One of the most powerful messages I took away from today is that if you take the time up front to choose the right structure for your fledgling business, it will save you a world of headaches in the future, and prepare you for faster and smoother growth.

I am going to be implementing a whole slew of process improvements in my business this year (including moving to a paperless office) and cannot wait to share what I am learning in future blog posts.

Have a great weekend!

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19 Responses to “What kind of business structure makes sense when starting a business?”

  1. bbw services says:

    This information is really helpful. thanks a lot dear. anyone interested in professional business restructuring services at reasonable rates may please consider this website. i have good experience as a client with this firm.

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  2. Samuel says:

    Awesome post Pam! I will check out the video. Well, I think choosing a structure for your business depends on the type of business you wants to start. and the one that will benefit you. I hope you understand what I’m saying? Thanks

  3. […] What kind of business structure makes sense when starting a business? from Escape From Cubicle Nation by Pamela Excerpt – I have been lucky enough to have been locked away in my office for the last two days with Kyle Durand, my good friend and seriously fierce business adviser. […]

  4. pr jobs sam says:

    That’s ok..Residing in the UK.
    Got the idea and thanks for sharing

  5. Joanna Swan says:

    Being a 22-year-old with hopes and dreams of not-so-far-off entrepreneurship, I can only say a humble “thank you” for the information I will no doubt be revisiting over and over as my journey into starting a business grows!

    Do you know what the most common structure is used by small restaurants, caterers, or gourment food trucks? (Can you guess I’m a total foodie?)

    Thanks to you both!
    Joanna @ the very newborn blog, Stoveless

  6. “Apologies to non-US readers)

    Apology accepted. Even if I’m not entirely sure what I’ve just read…

  7. this is a great thought starting post, and i think there is no one size fits all solution at all. there is one fact however that is not debatable for sure, and that is that no one should go at it w/o incorporating (as a sole proprietor for example). there are just way too many risks in the trigger happy society that we live in today.

    Kyle alludes to this separation in his discussion reg a separate bank account for business purposes

  8. Fred Leo says:

    Great advice Pam and Kyle. One thing that I have found that confuses new business owners is how to set up your business accounts once you have your business structure in place (e.g. bank accounts, paypal, credit cards, ect.). These practical issues can have a paralyzing effect on taking action. I would love to hear your thoughts Kyle. How do you advise your clients in these areas?

    • Kyle says:

      Great question, Fred! As we mentioned in the video, one of the most important steps an entrepreneur can take when setting up a new venture is to open a separate bank account for the new business. I could go on forever about the issues that will be avoided by taking this one step but will save everyone the pain of that soapbox speech.

      Although requirements vary, banks generally require 3 pieces of documentation to open a business account:
      1. Taxpayer ID (SSN for sole props & some partnerships, EIN for LLCs and Corps);
      2. Certification from the state or local government that you have authorization to operate a business under the chosen name (DBA, articles of incorporation for corps and articles of organization for LLCs);
      3. Authority to establish and operate a bank account for the business (DBA certificate is sufficient for sole props, banking resolution for corps, operating agreement/articles of organization for LLCs).

      As for Paypal, credit cards and any other sources of income or expense, the rule of thumb is easy: Make sure ALL income and expenses of the business are directed through the dedicated business account.

      This is such an important topic, so thanks again for raising it!

  9. I’m going to add my two cents here to let you know that KYLE IS THE BOMB.

    I will never need to hire another tax attorney, because Kyle has been the information provider and the business architect that I need (and will continue to need) in all my business ventures.

    I love you both!

  10. elana carter says:

    I couldn’t take my eyes off the screen.
    Powerful..scintillating…Powerfully scintillating 🙂

    Great review. Raises awareness without the overwhelm.

  11. Joe says:

    Another great post, Pam. And I already added Kyle’s blog to my Google Reader feed too.

    Thanks again!

  12. Alexis Neely says:

    I love that you are sharing this with info with people Pam! Thanks for bringing these important issues out into the light. Let me know if I can ever add anything to this discussion. I’d love to talk asset protection, business structures, lifecycles. Great to meet you Kyle. Maybe we can do a call on this together one of these days for my community.

  13. LLC in California requires putting $800 in taxes up front!

    • Pamela says:

      I know Barbara, Kyle was saying CA and NY were two states that had REALLY high LLC fees. Most other states are much lower. Still, in the long run, depending on your business, it can be worth the protection and peace of mind to get that biz structure in place. When I was in California, I was a sole proprietor for a long time, but then it started to get gnarly with accounting as I got bigger projects. Kyle is the real nerd in this topic, maybe he has ideas for work-arounds.

      • Rob Place says:

        Great info Pam and Kyle!

        Living in NYC, the choice for my clients usually comes down the LLC vs the S-Corp. I like to generalize the two in the following way: the LLC is more expensive at the onset b/c of the publishing fees but is easier to manage while the S-Corp has lower startup costs but is much more reporting and filing.

        And in terms of liability, like you say, it really depends. I’ve had people wanting to start a coffee shop as a solo prop and just buy insurance. It’s not enough.

    • Kyle says:

      Hi Barbara. I would LOVE to be able to point you to an easy work-around for the ridiculous $800 LLC Franchise Tax in California. Several creative entrepreneurs have tried various methods, but the common thread is that the IRS and/or the state did not buy their arguments.

      The S-corporation, on the other hand, is taxed at a flat rate of 1.5% on its net income. So, if your net income is around $53k or less, you win. If it goes above $53k, you lose. But, the S-corp requires more administrative and accounting maintenance than an LLC. So, you might end up paying the savings to an accountant and/or attorney.

      As Pam mentioned, a decent solution to consider is operating as a sole proprietor with liability insurance. If your liability insurance premiums would be less than $800/year, it might be worthwhile to operate the business as a sole proprietor until your revenues grow to a point where the $800 bite wouldn’t hurt as much.

      I hope this helped a bit. The state is really hurting its entrepreneur community by imposing this tax.

      • Andy Pels says:

        Ah! Thanks for laying out the numbers and other considerations on this issue for those of us in states that just don’t get it.
        Maybe in California the state government figures they are doing us a favor by letting us know how we will be treated us if we decide to go into business here. How nice of them. 😉

  14. Kyle says:

    Thanks for hosting our business geek-out, Pam! I came away from it with tons of great ideas and am excited to take my business to the next level by implementing your sage advice.

    I can’t wait to see how your transition to a paperless office goes. A word of warning, though; once you go down this path, you will never go back.