Join Dana Robinson for an in-depth discussion in this video Deciding between sole proprietorship and corporate entity, part of Setting Up Your Small Business as a Legal Entity.
- Almost everyone knows what a corporation is. Every product you purchase has the name of a corporation or an LLC on it, in fact there are millions of new corporate filings done every year, but when it comes down to understanding the role of the corporation, and deciding if you need to incorporate people get confused. It's okay to be confused, there're a lot of questions, where do you file, what type of entity should you file, what are the costs, what are the forms and the formalities, do you even need to form a corporate entity? I get these questions and many others asked every day by my clients.
If you have these questions you are not alone. If you're going to start a business, or if you are already doing business, you're going to face these questions. Many people think they need to hire an attorney to incorporate. I'm an attorney and I'm happy to help my clients incorporate, but you don't necessarily need to hire an attorney, and even if you decide you want to use an attorney I'd like to help you become more knowledgeable about incorporation. Let's talk about how a business typically starts. A business starts with a person who starts a new venture.
Maybe you're watching this because you've already started doing something. If you start cleaning pools or mowing lawns you're in business. If you start doing bookkeeping or computer programing, or charging people money for business, you're in business. There are thousands of things that people do to turn into business, but in most cases when someone starts a commercial enterprise they don't just go incorporate on day one. Instead, they start doing business under their own name as what we call a sole proprietor. What is a sole proprietorship? A sole proprietorship means a business operated by an individual person without a corporate entity.
You're just a natural person who does business under your own name. You can also be a sole proprietor and use a business name, or as we often call it a fictitious name. You've probably heard of a fictitious business name or FBN, it's also known as a DBA or doing business as. A DBA is simply a way to call your business something businessish, but still operate as simply a natural person. For example, my first business was called Cricket Lawn Care, it was a fictitious business name for Dana Robinson.
There was no corporate entity, but I didn't want my customers to think of the business as Dana Robinson, so I filed the fictitious business name to say that I was Dana Robinson doing business as Cricket Lawn Care. To hold myself out as a business name rather than my personal name. With my fictitious business name I could then open a bank account in the name of the business, take checks from my customers in the name of the business. However, at the bottom the business was the same as if I had just been Dana Robinson. The DBA simply means Dana Robinson equals Cricket Lawn Care.
Again, a sole proprietorship is not a corporate entity, it's simply you doing business under either your own personal name or a business name. Millions of businesses in America are sole proprietorships, the barber, the pool guy, the handyman, the yoga teacher, they're all likely to be sole proprietorships. I'm often asked if there's a downside to being a sole proprietor, there is. A sole proprietor is personally liable for the risks of the business. This includes financial risks, as well as injuries and other liabilities that arise in the course of the business.
Incorporation separates you as the owner from the business providing a shield against personal liability, but you don't have to incorporate to deal with personal liability. Insurance can also provide a way to protect the owner's personal assets. For Cricket Lawn Care, my first business, I acquired a commercial and general liability insurance policy. That covered business risks, and helped avoid the liabilities that may have created a risk to me personally. While I had some personal risks, I used an insurance policy to insure against the biggest risks.
A typical small business can avoid incorporating, and just do business under a fictitious business name, and use insurance to avoid major liabilities. That was the approach I took in my first business, and it is often the most economical path for newer small businesses. If you're going to operate as a sole proprietorship I urge you to acquire insurance, but in most cases it is advisable also to incorporate. If you're watching this course then you probably are at the point where you're thinking about incorporation, let's take the next step and talk about incorporation.
DISCLAIMER: This course is taught by an attorney and addresses US law concepts that may not apply in all countries. Neither LInkedIn nor the attorney teaching the course represents you and they are not giving legal advice. The information conveyed through this course is akin to a college or law school course; it is not intended to give legal advice, but instead to communicate basic information to help viewers understand the basics of intellectual property.
- What is a sole proprietorship?
- Understanding corporate entities
- Exploring corporations and LLCs
- Choosing a corporate entity
- Creating an operating agreement
- Exploring incorporating examples
- Establishing an IRS tax ID