One of the most common questions I get from my entrepreneur clients is about how to choose a structure for your business. Great question, y’all!
While I’m no legal buff, I’m so lucky to know Rob Bexley, managing attorney of the Bexley Law Firm, a Lawrenceville-based lawyer who specializes in working with entrepreneurs, Mom & Pop small businesses, LGBTQ+ folx, tattoo artists, and other marginalized groups who may not have access to justice. (How badass is that?!)
He was kind enough to sit down and let me pick his brain about all the various business structure options for entrepreneurs. The result of these brain pickings is below. Hope you enjoy!
Michelle: Let’s start with the basics. If you’re a freelancer or entrepreneur, what are the available options when it comes to choosing a legal business structure?
Rob: There are really three main types of business structures. The first and simplest business structure is having no legal business structure at all, also known as a sole proprietorship or partnership. In simplest terms, this is one or more people getting together and doing business. To do this, you simply need to establish a doing-business-as (DBA) or a trade name with the county. It costs about $250 to do so, but for that price, you might as well spend that money on a different structure.
For all its simplicity, the sole proprietorship provides no liability protection whatsoever. Whether you’re a freelancer, or providing some kind of goods or services, any sort of harm you do—intentionally or negligently—puts your personal assets and your family at risk. You have no barrier between you and the judicial system. I have not found a single advantage that outweighs all the disadvantages. Maybe if you were a child running a lemonade stand, you could get away with a sole proprietorship… otherwise you will need some sort of liability protection. Even if you don’t anticipate doing harm, your consulting advice could accidentally lead to financial consequences, your services could harm someone negatively on accident, you could be on the job and hit someone with your car on the way to a meeting, the list goes on and on. For this reason, I highly discourage sole proprietorships and partnerships.
The next business structure is the corporate structure. This is the one that everyone has heard of, but people often don’t know what it means. There are basically two categories of corporations: The C Corp and the S Corp. C Corps are popular with larger companies and those who aspire to that size, because they generally have the ability to sell unlimited stock in the company. On the other hand, the S Corp is a streamlined version of the C Corp and is meant for smaller corporations who don’t need a lot of investors. This structure also comes with tax advantages that are specific to certain industries.
The problem with both C Corps and S Corps is that they’re legally complicated to maintain. They require more documentation, more complex notification to newspapers and government authorities, and they can be heavily regulated depending on whether they have investors. Corporations are also required to hold regular shareholder meetings and officer meetings with minutes taken, and if you don’t follow all those rules and jump through the hoops and something bad happens, it wouldn’t take a very skilled lawyer to “breach the corporate veil.” That’s what happens when you’re able to strip a business of liability protections by showing it’s just an extension of one person’s private wealth. So if your business is an extension of your checking account, it’s not a proper corporation, it’s essentially a fraud or facsimile. If you don’t have meetings, bylaws, officer meetings, all that documentation, those are also indicators of a business that is not being run property, which, again, be used to strip the company of the liability protection just when you need it the most.
This brings us to the third, and my personal favorite business structure, the Limited Liability Company, or LLC. In my opinion, this is the most flexible, affordable, and easy to manage business structure of all that’s out there. In the state of Georgia for instance, you can have a basic single member LLC, and still be afforded full liability protection. This structure also usually makes filing your taxes easy, because it has pass through transaction. Whatever profit or loss you make gets passed on straight to you, which allows you to avoid the double taxation issues that result from a C Corp or S Corp. Then again, if you wanted to have the double transaction structure of a C Corp, you can elect to file your LLC taxes that way as well.
With an LLC, you’re also not required to hold regular meetings, and there are no shareholders, but you can still have investors. You’re not bound to the same investor regulatory oversight that you would with a corporation.
As an added bonus, in the state of Georgia, you don’t even have to inform the government of who the organizers are of the LLC are; you can have complete and total anonymity with an LLC. Your attorney can put their name on the paperwork without needing to be an owner or investor in the company, which is particularly useful if you’re operating in an industry that could cause embarrassment, or you simply don’t want to be associated with the business for private reasons. Your attorney’s name would simply be listed as the organizer, without being the owner. Some businesses appreciate that anonymity.
Finally, setting up an LLC is more affordable, usually about 50% cheaper to set up vs. a corporation. 75% of the business that I create are LLCs.
There are a few other lesser known business structures, but most people don’t worry about those. There are Professional Corps (PCs), which are popular among accountants, doctors, and lawyers. Then you have the Professional Limited Liability Company (PLLC), which is designed only for members of the same profession, offering services related to that profession. Non-profit corporations are also an option for non-profit organizations. Recently, a newer structure known as a B Corps have sprung up as well; those are a hybrid between non-profit and for-profit businesses. It’s not a legally recognized business structure, but it provides a way of certifying that a private company is a socially conscious organization. Owners and investors in B Corps still make a profit. However, the company’s primary purpose is not necessarily to maximize profit, but rather to use its corporate structure to improve the community—or at least not do harm to the community. It bridges the gap between non-profit and socially conscious organizations, for example if you want a non-profit culture and the ability to make money at the same time.
Michelle: Well, you’ve definitely confirmed my own research that suggests that the LLC was the optimal business structure in most cases, but all that detail was certainly helpful. Is there any reason at all you’d want a corporation over an LLC?
Rob: The only time when you need a corporation is when your accountant says so, like if they want to do something that gives you a specific financial reason to incorporate. Barring that type of specific reason, having a corporation for the sake of having a corporation is needlessly complex and convoluted. I see this a lot with people who want the “Inc.” at the end of the business name, because “everyone else has one.” Some folks also have this false notion that a LLC isn’t as good, or that it gives you less protection. But I see the LLC as titanium, lighter than steel but just as strong, flexible, and versatile.
I will say that lots of young people understand the value of LLCs more, just because LLCs are only 20 years old. At this point, all 50 states recognize LLCs, but because it’s a relatively new business structure (at least compared to the centuries-old Corporation), a lot of old-school business owners disregard the LLC business structure or write it off as being not useful.
The only other reason you’d want a corporation over an LLC is if you are a non-profit entity. Interestingly enough, the federal government DOES recognize LLCs as non-profit entities, but most states do not.
Michelle: Okay, good. So, we’re on team LLC here. But one of the other questions I frequently get is figuring out WHEN to incorporate. How do you know when you’re ready to make your side hustle or small business into a proper LLC?
Rob: To be perfectly honest, I almost always advise folks to get the LLC before it’s even a side hustle—you should have the structure before you even start exchanging money. To me, this is just part of the cost of doing business. People often want to forego the legal stuff because they don’t see the immediate value. In all candor, it is a prerequisite to going into business. When you get a business license, go ahead and get the LLC. As a consumer, I won’t take you seriously if I don’t see a “LLC” or “Inc.” after a name. At the very least, when I see someone who has had a modicum of vetting, I know that they’ve got some skin in the game with a government entity. People who are there to scam you don’t want to legitimize themselves with a government entity.
If you want people to take your business seriously, and to expand your reach beyond close friends and family, or you have something to lose, get the LLC. If you drive a 1995 Celica and live with your parents, and you have absolutely nothing to take, then who cares? But if you have a family, a house, any sort of retirement savings, anything like that, you definitely need the liability protection.
As far as money goes, the cost is relatively minor. Most respected attorneys don’t charge that much; for instance, I charge $150 in attorney fees and $100 for state filing fees. If you pay someone a total of $250 to setup a basic LLC, that costs basically the same as using LegalZoom. Don’t pay more than $300 unless you need lots of bells and whistles. One note on LegalZoom by the way: this might sound self-serving, but I usually discourage folks from using LegalZoom. I’ve tried to see what it’s like by going through the process of making a fake LLC. By the time I was done with the process, my online shopping cart was $750-800, because they wanted me to buy all these add-ons that small businesses don’t actually need. So just be careful with that.
Once you have registered as an LLC, you just have to pay $50/year in annual registration fees to keep it in business. It’s even easy to renew and serve as your own registered agent, which will save you a few bucks. For the cost of a few trips to Starbucks, forming an LLC is the cheapest insurance in the world. You ensure that if you get sued, a plaintiff won’t take your house. It’s stupid cheap insurance.
If you’re a multimember LLC, the legal fees will cost a little extra. The reason for that is just as a corporation has bylaws, an LLC should have an organizational agreement, which is best to have an attorney prepare. The organizational agreement establishes the managing members, how profits are shared, how you’ll resolve disagreements, etc. So, it costs more as a startup cost, but the annual $50 fee is exactly the same.
I’ll also add that if you’re going into business with another person, DEFINITELY get an LLC or a corporation. You may think your work will be perfect, but you can’t account for your business partner. If they screw something up, that blowback is coming to you. However, if you’re operating as an LLC, and your business partner screws something up, the business is protected, and you as an individual are protected from the impacts of your business activities. And if your partner does something so far outside the box of legality, if they steal something, punch someone in the face, commit an act of fraud, etc. and you knew nothing about it, your business AND you would be protected, and your partner would be subject to a liability. If you were operating as a basic partnership, your business partner’s bad behavior could both sink the business and leave you on the hook.
Michelle: You mentioned a business license. How is that different from the LLC, or other business structure?
Rob: The business license is separate from the LLC, yes. All businesses in the State of Georgia that conduct trade need a business license. If someone gives you money for a good or service, you have to have a business license, even if you’re working from home or running a non-profit business. This is usually done at the county or city level.
Luckily, getting a business license is fairly cheap, with prices based on a certain percentage of revenue. They ask you to guess for the first year, then recertify your estimated revenues each year when you renew it. In my experience, if you make $100,000 in revenues, your business license might cost $300-400 per year is all. I’ll also add that it’s pretty easy to get one. Don’t pay an attorney 100’s of dollars just to stand in line and fill out a form for you.
You don’t need a business license until you start making money, though. Even if you have an LLC and tax ID number, you don’t need the business license until money changes hands. There’s no law requiring you to form a corporation or LLC; there’s not even a law requiring an agreement for a multimember LLC. It’s dumb not to, but it’s not technically required. A business license is required by law, though. Once money changes hands, the business license is mandatory.
While people don’t like paying these fees or the intrusive government bureaucracy, I want to emphasize again that this is just a cost of doing business. I don’t want to do business with someone who doesn’t have that business license. If you’re not willing to fill out the form, what other corners could you be cutting? A business that doesn’t want to do things by the book is worrisome, because what things can’t you see that they‘re also ignoring to save money? It’s a way of at least saying there’s a certain level of legitimacy. Doesn’t make you above the board to have one, but if you DON’T have a business license or a business structure, it’s hard for me to trust you unless I know you personally.
Michelle: I also want to get back to something else you mentioned earlier, about investors. This is a big concern for small business owners, because they want to make sure their business structure is friendly to investors. In addition, do you have any tips on how to actually find investors?
Rob: So, how to find people who will give you money to start up your business? What I tell most people is to first go to friends and family, people you can trust but who would be interested in making money off of you. Those types of people in your inner circle have more faith in who you are and what you’re passionate about, and if people feel like you’ll be successful, they may want to give you $10k but expect in a year to have $12k, or something like that. It’s not necessarily a loan, it’s an investment opportunity.
There are also private investors or angel investors, where someone wants to give money to help you get off the ground. You can go on the internet and look up angel investors, if you’re interested in learning more about that.
In terms of how to work with someone once you’ve found funding, if you’re an LLC, you don’t have traditional shareholders. Rather, you have “members” of the LLC who don’t take an active role in it. These members don’t manage the business, but rather they just want to invest in your company. Maybe they gave you $1k and that entitles them to a percent of your profits every year, or every quarter. That’s where the multimember LLC organizational agreement comes in—you can use that to manage your investors. This document creates the legal framework to tie people together, figure out who’s responsible for what, who’s liable for what, etc. I recommend working with an attorney to draft that document, since there’s a lot more opportunity for tension once you start taking on other partners or members.
Michelle: Awesome. That’s super useful information. So, switching gears a little bit, I want to talk about another big legal consideration for entrepreneurs and small business owners: contracts. Can you speak a little bit about how to make good contracts?
Rob: Many of my clients ask questions about contracts as well: when they need contracts, how they manage their contracts, etc. Everything in our world is controlled by contracts and agreements. Facebook, your phone agreement, your internet provider… our entire world is made of written and unwritten agreements and contracts. If you want to sign a lease or rent an office space, you’ll need a signed lease agreement. Unless you have a background in contract drafting, expertise in these sorts of documents, or you’ve gone through this process at least a few times before, it’s relatively foolish to expect yourself to sit down with a complicated legal document and understand every single nuance.
As a result, I don’t have a lot of good advice for making and reviewing your own contracts, because I believe one of the costs of doing business is to take your agreement and purchase an hour or two of time from an attorney who can read the contract. It takes them a fraction of time vs. a layperson. If you have a pain in your stomach, you can research for 4-5 hours on Google and try to self-diagnose, or you can go to a doctor who has seen 50-60 similar cases and can ID the symptoms right away. Likewise, most good attorneys can look at a contract, identify abnormal provisions for your industry, tell you which clauses could be problematic, or confirm that the contract is a well-written, boilerplate agreement and you can sign it with confidence.
You’re paying for peace of mind at the end of the day, like insurance that you never use. That’s not wasted money, because paying for insurance you don’t use is paying a fee to avoid the gamble of something bad happening. You’ve paid an attorney to eliminate the possibility of a poisonous contract.
Now, not every contract needs to go in front of an attorney. But something like a lease agreement is far more negotiable than people think. I’ve rarely encountered a lessor who is not willing to negotiate at least some aspect of the lease, to some extent. They’re in the business of making money too, so it all depends on how long the space has been open. If they’re having a hard time finding a tenant, they might be more flexible. An attorney can come in and tell you whether a negotiated provision is reasonable, or if something in the lease can cause you certain harm. There’s no such thing as a good lease in and of itself; that all depends on your price and location, but if you’re paying a ton of money and you’re not sure you’ll even be in business in five years, that’s not a good lease.
One other thing while we’re on the subject of leases: I also caution people to avoid becoming personal guarantors on leases, loans, or credit cards. That puts all your personal assets at risk. It’s a self-piercing provision. If your business can’t make the payments, you must as an individual. If you default and you owe the remainder of your lease at once, which can cost thousands and thousands of dollars, that’s coming out of your pocket. If you don’t pay it, they’ll come after you personally. I’ve seen a lot of people go bankrupt by personally guaranteeing a lease. If you find a lessor who requires a personal guarantee, it might be time to move on and find a different lease. When you’re just getting started, you may need an alternative situation such as month to month rent or a shared space, until you’re well-established and someone is willing to lease to your business without a personal guarantee.
Michelle: That’s great to know. Anything else you’d like to share with my entrepreneurial readers, while I have you here?
Rob: Yes. For god’s sake, don’t get a credit card in your name for the business. Anything that has your name attached, puts you in jeopardy. Use your business name for everything.
People get into trouble with how they spend their business’ money. I don’t give tax advice, but anything that’s for the explicit benefit of the business is okay to charge to business account. In terms of write-offs, that’s a discussion for you and your tax professional, but I can at least speak to the liability that arises when you comingle your business and your personal finances.
Let’s say for example that you’re going to the grocery store and you find you’ve misplaced your personal debit card and payday is coming up. Don’t use the business card to fill the gap in the meantime. It’s better to go without groceries than to start yourself down that path. I’ve had a business owner sue his partner because after looking over the books, he discovered that the other partner put his wife’s OBGYN charges on the business card. I shouldn’t have to say this, but that’s a hard nope. If your corporate veil will be pierced, it will be for dumb shit like that.
If you find if you need to pay yourself for whatever reason, write yourself a check. Don’t just take cash out of your business card at an ATM, and if your business owes you $1000, don’t just spend $1000 of the business money and call it even. If you do activities like that, you’ve just pissed away all your LLC protections. Now, one instance isn’t going ruin everything, but if you’re in a lawsuit and there’s a pattern of those behaviors, it’s not hard to pierce a corporate veil with someone who has been sloppy.
A business owner should always think about their liability exposure they have at any given time. Some businesses and industries have more than others. For instance, the construction industry has extremely high liability. If you’re a graphic designer, you might have lower liability, but there’s still some inherent liability in any business.
As a business owner, it is your job to conduct an analysis of all the foreseeable ways you could cause someone harm. As a restaurant owner, your oven could burn down the place, a server could trip and fall, you could accidentally poison someone’s food with an allergen, your delivery driver could hit a kid in a neighborhood, etc. Figure out to what extent your business can cause harm to someone, and approach your insurance, cost of legal assistance, etc. accordingly.
One last thing: Never second guess the need for strong professional assistance in your business. Whether that’s finance, CPAs, insurance, or legal assistance, this is the cost of doing business. Don’t skimp or cut corners on these levels of protection. If your business can’t afford insurance, then the time isn’t right to be in business. If you can’t afford an attorney to help you in opening up, it might not be the right time. “I can’t afford it” is not an acceptable excuse, especially when there are affordable options out there.
Fancy structures, trademarks, those types of things can be expensive, but the basics are not. And they’re a hell of a lot cheaper than getting sued. It’s easier to prevent cancer than to cure it. The same goes for law: it’s cheaper and easier to prevent a lawsuit than it is to win a lawsuit.
Thanks again to Rob for his time and assistance in drafting this useful article! If you want to read more about Rob’s work, you can check out his law firm’s website and get his contact information at https://www.bexleylawfirm.com.