Creating a Business
You've got a great idea or a strong set of skills and are ready to try your hand as a business owner. Turning an idea into a business is no simple task, but the risks you take to become a business owner can be personally and financially rewarding.
An important decision you'll need to make is whether you want to go through the legal process of creating a business.
During the process of setting up your business, you can choose one of many different legal structures for your business. Some give you the option to have little to no legal or financial separation between your personal and business finances. Others create a legal organization (generally called an entity) that is, in most cases, legally and financially separate from you, the business owner.
There are a range of legal business structures available to you depending on where you live. Research the various options on your government's official website.
Benefits of Creating a Business
Creating a separate legal entity could offer you several benefits:
- Limit your risk. Creating a business entity allows you to separate your personal assets and liability from the business's assets and liability.
Your personal assets are anything of value that you own, such as your home, car and the money in your bank accounts. Your personal liability is how much you could be legally responsible if a person, organization or government gets hurt or is owed money by you or a business for which you are liable.
A business's assets could include equipment, bank account balances (in savings or checking accounts, for example) and money that's owed to the business. A business entity can also be legally responsible, or liable, if a person, organization or government gets hurt. This could happen at the business's location, be due to a business's product or occur when the business owes someone else money.
As an example, someone might slip, fall and get hurt in your store. The person decides to sue, and the court agrees that someone should pay for his medical bills. Who is that someone?
If you didn't create a separate business entity, you may be personally responsible (i.e., liable) for the medical bills. If you did create a separate business entity, the business may be responsible for the bills.
The business might have to shut down if it can't afford the bills. However, your home, vehicle, personal savings and other assets are protected. You've limited your personal liability by legally creating a business entity.
The legal system is filled with exceptions, though, and creating a business entity won't always limit your liability or protect your personal property and money. For example, many small business owners have to agree to personally repay debts when taking out a business loan or credit card. Or, you may be liable for business expenses if you mix your business and personal accounts.
Benefits of creating a separate business entity can include:
- Access to additional money. Some types of loans, credit lines and financing are generally only available if you have a business entity. For example, investors might offer you money in exchange for partial ownership of your company (also called equity in your company). It can be difficult to offer equity if you haven't created a business entity.
- Build business credit. Your business can build its own business credit history and business credit scores, which it can use to borrow money, open a business line of credit or get a better arrangement with suppliers. Business credit history can help create and maintain separation between the business and the business owner. Access to business credit and funding options could help you run your business and pay for improvements without using your personal money or credit.
- Receive potential tax savings. Business owners can choose between several options for how and when they get paid as the owner of the business and as an employee of the business. Some options may decrease how much you personally pay in taxes.
- Sell the business in the future. If you think you might want to sell your business in the future, it could be easier to transfer ownership if you create a separate business entity.
- Appear professional. Creating a business entity could help you appear more professional during your work with suppliers, investors, financial institutions and customers.
In addition to deciding if you want to create a business entity, you will have to pick which type of legal structure you want to use for your business.
Many small business owners can choose between several options when creating a business entity. Some will merge your personal and business liability and finances, while others provide distinct separation between the two. Finding the best business structure for you will vary based on local laws and regulations. You can use your government’s official website to research the different structures that are available. It may be wise to consult an accountant and business attorney before choosing your business's structure.
Each business structure has its advantages and disadvantages. The best option may depend on your personal financial situation and goals for the business.