Tammy Fisher, EA

Crawl, Walk Run.

If you served in the military, or you've been around someone who served, that's a phrase you've heard before. Crawl, walk, run.

And so it goes with business formations.

CRAWL.....

The simplest business formation is the DBA - doing business as. Cathy Clark goes down to the county clerk's office at her local courthouse, files the paperwork for a DBA, pays a small fee and voila -- she is now Cathy Clark doing business as Cathy's Crazy Cupcakes. She can use her SS# as her Tax ID - or get an EIN from the IRS (easy to do online). She can open a business bank account to keep her business funds separate from her personal (as she should!) and carry on from there. Easy Peasy.

WALK....

As she grows and her revenues rise, Cathy will want to consider forming an LLC - a Limited Liability Company. An LLC does exactly what it says -- it limits your liability to the company. For example, let's say Cathy makes a bad batch of cakes and someone gets food poisoning. Oh no! Let's say they sue Cathy's Cupcakes because they were in the hospital for a week and they missed work, etc. ( this is probably a poor example but play along with me) If Cathy is a simple DBA, she is personally liable..... her personal assets are in play here. BUT - as an LLC, her liability is limited to Cathy's Crazy Cupcakes LLC. The LLC forms a wall between her business and personal assets, offering protection in cases of lawsuits, debt collection and bankruptcy.

Now - for these to be valid, it is CRUCIAL to operate your LLC as an independent entity. That means you cannot mix personal assets/funds with business. Anything LLC must be completely separate from your personal - bank accounts, credit cards, etc. All documents pertaining to your LLC - invoices, purchase orders, etc. - should have the LLC name and be signed on behalf of the LLC.

Everyone doing business with your LLC should know they are doing business WITH YOUR LLC and not you personally.

You can form your own LLC by visiting the Secretary of State website. The fee is $300.

RUN.....

When Cathy gets REALLY successful, she can consider becoming a Corporation. There are 2 choices here - Scorp or Ccorp. The main difference between the two is how they are taxed, but there are some other differences involving their membership, shareholders and classes of stock.

Both Scorp and Ccorp entities come with attractive tax advantages; options that LLCs and DBAs don't get. However, you gotta have the $$$$ to play in these waters. Many, many times, we see small businesses take on these formations - especially Scorp - and they're just not ready. They don't have the revenue for it and they can't meet some or most of the IRS required guidelines for things like "reasonable compensation" to the owners, to name one example.

Forming a corporation is a bit more complicated than an LLC; there are more forms and documents required. My advice is to consult with an attorney, CPA or other qualified professional to ensure everything is correctly in place.

So you see, you need to crawl and walk before you run.

And as always - seek the advice of a qualified pro before you take a blind leap.

(This was part of my Secrets of an Accounting & Tax Pro workshop from the Professional Women's Summit. I get to expand on the topics a little more here. There will be more to come over the next few weeks. Let me know if you find it helpful!)

Tammy Fisher, EA

Brownwood, Texas, United States 2K followers 500+ connections

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