5 Things to Consider Before Creating a Business Entity

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A legal entity involves different individuals coming together to run a business. Various aspects affect the operations of a company according to its type: from taxation, liability for debts and the obligations of the owners.

State laws govern the formation of businesses, meaning the rights and obligations of business owners are determined by the state that is their legal domicile.

In order to gain recognition, a business entity needs an identity distinct from its owners, especially corporations, partnerships, or LLCs. All these companies should be legally registered in their home state. Here, the rights and responsibilities of employers are governed by the laws of the state where the company is incorporated.

LLCs are very popular among businesses because they limit the liability of owners. The limited liability company (LLC) is a relatively modern corporate form with several advantages for its owners. Some well-known examples include IBM, Sony, Pepsi-Cola, Nike, Blackberry, eBay, etc.

If you’re about to register your own business, here are some key points you shouldn’t overlook.

#1. Tax considerations

Tax implications are one of the key aspects to consider when starting a new business. Your business may be subject to corporate or sales tax if you want to sell goods. There are also city, state and individual taxes depending on the size, state and structure of your business operations. Therefore, it is a good idea to consult professionals like doola to help choose the right state and structure to form your LLC and minimize tax liabilities, taking into account how your company’s legal structure decides the tax burden of your company.

Sole proprietorships and partnerships are common forms of business organization where you are treated as the same entity as the business. Therefore, any gains or losses attributable to your interest in the business are included in your personal income.

For tax liability and liability reasons, go for C-corporation as they are treated regardless of your income. Meaning; that business losses or gains cannot affect its taxability. The Tax Cuts and Jobs Act (TCJA) established a new, flat corporate tax rate of 21%. Profits are given to shareholders after paying taxes.
Each shareholder’s share of these earnings is taxed at a personal rate under “double taxation”: this policy results in two separate tax payments: one by the company and one by the shareholders.

#2. Forms, presentation and deadlines

The type of business structure also defines the seriousness of your involvement in the business. LLC, for example, would have many periodic filings and deadlines compared to a sole proprietorship.

To begin, it would be necessary to present the documentation and establish an official entity. The amount of this documentation varies according to the business structure.

In addition, you may also need to provide:

  • Operating agreements
  • Intellectual property agreement, if required
  • Nondisclosure Agreements (NDAs)
  • Purchase and sale agreements between shareholders
  • Work agreements

There are different criteria for creating legal procedures for selling certain goods and services. Verify that you have completed all required business documentation based on the type of business, the products and services you sell, the state your business operates from, etc.

There are a lot of hoops to jump through: Notifying the IRS if you’re now self-employed, registering for VAT, forming an LLC, and getting the necessary health and safety certifications. You may face a hefty fine if you fail to comply with the filing and documentation compliance rules.

#3. Administration and operation

Administrative and operational competencies differ according to different types of business structures. For example, a corporate entity will have its most important decisions made by the board of directors.

It doesn’t matter if a company ventures as a sole proprietorship, as it grows in terms of profits and capital, it should convert to an LLC or C corporation. By doing so, decision-making power is distributed to the board of directors, where all important decisions affecting the company should be recorded.

A partnership firm may have a deed that decides the administration and operations of the firm. But, corporations are owned by their shareholders rather than their employees, unlike sole proprietorships, partnerships, and LLCs.

Depending on the structure of the company, shareholders may or may not be eligible for executive positions. Mark Zuckerberg, for example, plays the dual role of corporate executive and shareholder at Facebook, but this is not the case for all Facebook shareholders.

Therefore, it is better to navigate the right path for your business growth by considering administrative and operational decision-making before choosing a legal identity. For example, a company’s articles of incorporation (AOI) include a list of incorporators and corporate executives (also known as directors) who hold various roles.

#4. Compliance costs

You should be aware that maintaining an active US corporation involves several minimal fees to keep your business running. It is better to monitor other operational expenses to ensure smooth business operation.
In addition to the general operating cost of your business, such as payroll, travel, rent, depreciation, etc., here are some of the key compliance costs you need to consider when starting a new business .

  • Annual franchise tax fees: If you own a franchise business as an LLC or corporation, the annual franchise tax ranges from $200 to $1,000. Here’s how to calculate.
  • Service and attorney fees for incorporation: States charge $1,000 to $1,200 for corporations, $1,500 for S-Corporations, and $500 to $900 for LLCs.
  • Accounting and tax preparation expenses: Ranges from $100 to $5,000 per year $100 to $5,000 per year. The penalty for not filing the tax is at least $10,000.
  • Other expenses include operating agreements (as mentioned above), start-up insurance, industry-specific licenses such as food shops licence, etc.

For more information, read this post about how much it costs to incorporate in each state.

#5. Consider fundraising and future aspects

Consider exploring possibilities like a small business loan or a crowdfunding campaign for your business entity. The sources from which you can finance your business depend on its type and vision. For example, registering a sole proprietorship or a business association will not allow you to seek funding from financiers and investors. Instead, you’ll rely on personal funds, bank loans, credit from friends and family, or occasional grants from the government or non-profit organizations.

Some owners can start up without outside funding (also known as “bootstrapping”). But, it also exposes them to greater financial risk.

Otherwise, a corporation or LLC may benefit from the following fundraising options:


Considering the factors mentioned above can help you navigate the right structure to set up your company. First, it’s best to consult with compliance experts before weighing the pros and cons of different business structures and the factors that affect each.

Starting a new business is exciting, but like any venture, it comes with its fair share of considerations to make it run smoothly, both before and after you incorporate a business.

Image: Depositphotos

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