How do you get your blogging business started?
Many bloggers who are just starting out don’t think of what they do as a “business.” When you start putting up ads and expanding your reach, it may be time to start acting like one, however.
For those that are new to the business game (we all were, at some point), I’ve written a quick primer on the four main types of businesses, from a legal perspective. Of course, this is for the US, though many other countries have their own versions of these. The rules may be different, however, so consult an attorney in your home country (or wherever you’re forming your business).
The big reasons to form a business entity:
People form business entities for a number of reasons, but the main ones are the following:
- Limiting their legal and monetary liability
- Protecting their personal assets from business liability
- Giving the business some credibility in the eyes of others
- Defining the relationship between the principles of the business
- Separating their personal life from their business lives
- Allowing the company to live on after the principles have sold it or left the business
There are two major things to consider when choosing the type of business entity – whether it offers limited liability and tax consequences. I’ll lay out the four major types of businesses and how they deal with these two considerations.
So you’re in business by yourself? Congrats – legally, you’re known as a sole proprietor.
What does this mean? Well, not much. It’s simply a legal category that says that you are running a business that is not separate from yourself. The sole proprietorship doesn’t limit your personal liability for business debts in any way. So, if the “business” gets hit with a copyright infringement lawsuit or a contract dispute, your personal funds would be up for grabs if you lose.
It’s simply a legal category that says that you are running a business that is not separate from yourself. The sole proprietorship doesn’t limit your personal liability for business debts in any way.
Also, as far as taxes go, all business income “passes through” the sole proprietorship into your personal income taxes.
Going into business with another person? By default, this is known as a partnership. The “general” part means that every partner is active in managing the partnership, as opposed to a “limited” partnership where there are people who just put money in, but don’t manage.
This is like a multiple-person version of the sole proprietorship, with regard to liability and taxes. However, in a partnership, everyone is equally liable.
Without some kind of written agreement between the partners, the default rules for that jurisdiction apply. This usually means that:
- all profits and losses are split equally;
- every partner has equal control;
- every partner can make agreements and legally bind the partnership.
If that’s not how you want it to be, you should get a written agreement. For instance, if you’re doing 90 percent of the work and the other partner is just doing 10, your agreement can reflect this with regard to profits.
Corporations are the other side of the spectrum from the first two types of businesses. A corporation is a highly-structured business entity that brings with it a number of housekeeping issues. However, there are serious benefits to having a corporation as your business entity.
The first is strong limited liability. Any legal action against the corporation will not affect your personal assets beyond what money you have in the corporation. However, if you are not acting like a corporation, they could “pierce the corporate veil.” This includes various ongoing compliance requirements, such as regular board and shareholder meetings. Check out my post on the subject for more info on this.
A corporation is a highly-structured business entity that brings with it a number of housekeeping issues. However, there are serious benefits to having a corporation as your business entity.
Regarding taxes, it depends on the type of corporation. A “C-Corp” is actually taxed twice: the corporation is taxed on their earnings, and then the profits that shareholders earn are taxed again. However, an “S-Corp,” which is a different type of corporation with certain requirements (usually a low number of shareholders), allows the taxes to pass through to the shareholder. That way, it kind of acts like a partnership or an LLC, which we’ll see next.
Corporations are also very good as far as transferability. Since they are “owned” by the shareholders, selling those shares is a good way to transfer ownership.
Limited Liability Companies (LLCs):
LLCs were created in order to give businesses the best of both worlds: limited liability and pass-through taxation. So, you can use an LLC formation to shield your personal assets while having the profits and losses pass through to your personal taxes.
If you want, you can have your LLC taxed like a corporation, either a C-corp or S-corp. They are pretty flexible. You can even have a single-member LLC in many US states, allowing a sole proprietor to take advantage of limited liability.
LLCs are super flexible for business owners, making them a great choice for a small business or solo operation.
How do you choose?
What kind of business entity you choose is a very fact-specific analysis. I would caution anyone starting a business to consult with a lawyer before moving forward, so you can weigh the pros and cons of each type before making your final decision.