August 20, 2020
Starting a Business; the Journey Begins!
Congratulations: You've leveled up from corporate drone to an ambitious entrepreneur! There are many stages of your journey on road to riches and we at Formations would be honored to show you some of those steps.
The Origin Story
There are many reasons people like yourself seek to be their own boss; maybe it's chafing at the corporate structure, the sudden loss of a position, or maybe you feel like you have something unique to build and offer to the general public that your corporate overlords failed to see the value. Any way you slice it you have thrown off the shackles and are now free to explore your chosen industry the way you want to.
Where you go from here will be one of the most important decisions you make; you need to ask yourself some questions first to understand your next steps:
- What is it I'm selling? Do I have a product, or am I the product (ie my time is what I'm selling)?
- How big do I want to get? Am I just making a paycheck for myself or am I trying to build something bigger than me, something that can live on without me?
There is no wrong answer here; the answers instead will inform the path you take as a solopreneur.
Like with any epic quest you need to have the right gear to complete your mission; you can consider the LLC (Limited Liability Company) your first suit of armor, but like any starting armament it will be "limited" in its protective capabilities. It'll be enough to save you from a demise in most cases as you get going and will identify you to others as an adventurer worthy of notice, but it won't get you much further.
In this part of the journey (say up to around $40-60k in profits) the LLC will be adequate to separate your personal finances from your business. It says to anyone who looks to you for your services that you are serious about your work and have the tools to properly do the job. And it will keep a thin veil between you and the business in terms of exposure to tax and legal issues.
You'll also want to get a "treasure chest" to keep all that loot in; this is the business bank account you can open with an LLC. The reason you'll need an LLC to open a real business bank account is that you often need at least an EIN (Employer Identification Number) and a State Certificate of Formation (also known as State Business License) in order to open the account properly due to legal requirements levied on banks. But this is an important tool to use to further keep your business and personal separate; get this account open and start running the business income and expenses exclusively through it. It also doesn't mean you can't take some money from the company if you need it; you totally can! The money is yours to take you just need to use some common sense about how much you take at one time so you have the necessary funds to run the business day-to-day.
As you journey deeper into the realm of the self-employed (say cresting the rise of $60k profit) you'll find the LLC no longer offers the necessary level of protection to keep you both safe from liability and also to take the next step for your business. This is where you need a "sword and shield" to go with your armor, and that is the S-Corporation.
Should you obtain this valuable upgrade you will find more doors will open and more of the valuable loot you seek will stay in your pockets. An S-Corporation is a tax designation that tells the IRS you'd like to be treated as a Simple Corporation for the purpose of federal taxes. There's a lot to consider here and we've got a lot of material elsewhere on our blogs to review about it.
Always Listen to Your Wizard
Formations is here to be the resource that advises you on your journey; our experts have decades of experience creating and managing LLCs and S-Corps and even if you're not ready to take the plunge into managing an S-Corp we have different levels of service that can help emerging LLC's know when it's time to grab that sword and shield and tackle the next level of your business.