Business Organization Basics: What's Best For Your Business?
*Disclaimer: While I took business law classes, I am not a lawyer. Not even close. This post is strictly for educational purposes only to provide inspiration and share my story of registering my business.
Whether you're starting a record label, publishing company, or you're an artist, you should decide which type of business organization you're going to register your business under. Yes, even artists and bands should choose a business type and register as a business.
Why? Well, there are several factors to take into consideration, many of which are legal mumbo-jumbo, but are important nonetheless. If you're making money, signing contracts, and treating your music career as just that - an actual career - you want to be sure you're being taxed correctly, that you're legally protected, and that you can pay out anyone you hire.
Here are some business organization types that you might consider when starting your business. Please note, this is strictly from my college, graduate, and paralegal training education and is informational only. If you have any questions about entities, which type you should form, speak to lawyer in your state as they are most knolwedgeable on how to help you and your business.
Business Organization Types
Sole Proprietor
This is the simplest form of a business organization and the most used type in the United States. If you're operating your business and haven't filed with the state to form your business as a legal entity, then you're a sole proprietor. You can file to do business under another name (fictitious name), so your legal title would then be "[your name] doing business as [your company name]." Operating as a sole proprietor has its advantages as you start out, but there are disadvantages that can be costly to you as an individual.
Advantages
Sole proprietorship is cheap. There is no separate legal entity when you operate as a sole proprietor, and as such you control the entire business, and file your taxes with your personal income taxes.
Disadvantages
Here's the catch when you operate as a sole proprietor: You are personally liable, meaning that if you are sued all your personal assets are fair game.
LLC
This is one of the most popular business types, and is the type I am registering my business for in the state of California.
Advantages
It's in the title - limited liability. As a business owner, forming an LLC limits your personal liability. If the business is sued, your personal assets are protected by the shield of the business.
Disadvantages
There's a bit more work to creating an LLC than keeping your business as a sole proprietorship, and it can be a bit more costly. You'll need to file forms with your state to create a separate legal entity, maintain accounting separate from your personal accounting, create an operation agreement to describe how you'll manage your business, and in most cases, file taxes separately.
Corporation
A corporation is a different beast from sole proprietorship or LLCs. Owners of corporations are shareholders, and they elect the board of directors.
Advantages
Liability. As with LLCs, the shareholders are only liable for their equity in the corporation. Corporations can also raise funds for the company by selling different types of stock and other securities.
Disadvantages
Time and money. It not only takes time to create a corporation, including the creation of forms beyond just the Articles of Incorporation and the Operating Agreement, and to file it with the state, but it also takes more money. Tax is also a factor, as corporations are taxed at the business level and shareholders at the individual level.
Creating Broken Glass Media, LLC
I'm taking the steps to create a company around the blog, podcast, and another related business venture I'm looking into. Just last week I sent my Articles of Incorporation to the State of California, and started to draft a Limited Liability Company Operating Agreement for Broken Glass Media, LLC.
I chose an LLC for a few different reasons: I want to limit my personal liability, open a business bank account so business earnings stay separate from my personal money, and I want to have an overarching company for the three projects (plus, it's kinda cool to see LLC at the end of a business name!). LLCs can have members, who are owners or otherwise referenced as shareholders, but I'm choosing to own my LLC 100%.
Now that I've filed my Articles of Incorporation with the State of California, what's next? Well, as I await a response from Sacramento, I'm drafting my Operating Agreement. This a document that will regulate how I conduct business, how to bring in new members (if I decide to do so), how to manage the business and the books, and allocate profits and losses among members (if I choose to bring someone else on board as a member). This document is for my personal use within the company and will be readily available if it's requested by my bank, creditors, investors, etc.
Once I receive notice that my filing with the state has been accepted and I'm an LLC, my next step will be to obtain my Employer Identification Number from the IRS (similar to a social security number for an individual), file a statement of information with California, and make sure I'm on top of my taxes.
There's a lot that goes into filing for an LLC and you may want to consult a lawyer before you take any of these steps. These are just the steps I've taken in California, so be sure to check out your state's requirements to see what is necessary, the fees, etc.
*Disclaimer: I am not a lawyer. This post is strictly for educational purposes only to provide inspiration and share my story of registering my business.
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