by Art Neill and Teri Karobonik, co-authors of “Don’t Panic: A Legal Guide (in plain English) for Small Businesses & Creative Professionals“
You’re ready to take your project to the next level but don’t know where to start.
The first, and often the most important, step in making your project succeed is to formalize it as a business entity. Making sure your business is an actual legal entity can give you a higher level of credibility amongst professionals, investors, and consumers in your target market. There are also financial benefits like access to business loans, business bank accounts, and tax incentives, as well as legal benefits like limiting your personal liability.
The way you form your business is arguably the most critical business decision you will make, so choose with caution. The choice requires plenty of research; an understanding of your business goals; and a lot of self-reflection. You have a variety of options to choose from including sole proprietor, single member LLC, a partnership, traditional corporation, non-profit organization, and a host of others each containing their own qualifiers, positives and drawbacks.
The following is a brief overview of some of the essential characteristics that should be taken into consideration when deciding the type of business entity you wish to pursue.
If you start a business by yourself, the default business formation is a Sole Proprietorship. This is a traditional business formation where the owner is responsible for everything that happens in their business. As the name suggests, you will be in charge of everything including finances, day-to-day operations, and liability if anything goes wrong. The benefit of this model is that you get to control the direction of your business and can make changes immediately if needed.
Single Member LLC.
Another option for someone looking to control their own business is establishing a Limited Liability Company. This option is very popular because it allows the owner to have the same level of control as a sole proprietor would, but with the limited liability of a corporation. This means that if you follow your state’s requirements in starting and maintaining your LLC, your personal assets will be protected from lawsuits against your business. Besides protecting your personal assets, choosing an LLC gives you the option to file taxes as a sole proprietor or as a separate corporation in addition to your own personal taxes. This model requires several procedural formalities, however, like registering with the state, and many practical formalities, like keeping a separate bank account for the business.
A partnership is a good option if you started the project with other people that are equally as passionate about the project. Partnerships don’t require many formalities, but most good partnerships use contracts to distribute responsibilities and profits. The agreements should address things like basic operations, resolving partner disputes, and how to exit the partnership. Keep in mind partners will usually have equal control, equal profit, and equal liability, so make sure you trust the other partners before going down this path.
A corporation is a great choice if the owners are more hands-off, and want to hire qualified people to run the company for them. Owners of a corporation have two layers of protection against liability. First, as a shareholder you appoint a board of directors to handle business decisions, which can shield you from direct liability, and second, when hiring chief officers (CEO, CFO, COO etc.) to run the day-to-day operations you are further separated from liability. Corporations are very formal and require strict procedures, so it is advisable that you work with an attorney to help you properly form your corporation.
A non-profit is an organization whose activities focus on public benefit and do not generate a private profit for individuals or shareholders. Going the non-profit route can be very satisfying because you can put making a positive impact on society above all other goals. If you obtain status as a 501(c)(3) exempt non-profit organization with the IRS, the
big benefit is that the non-profit’s donations and income related to its mission are generally not taxable. In return for this exemption from taxes however, non-profit organizations are strictly regulated. Remember that in order to receive non-profit tax-exempt status, the company needs to be incorporated as a non-profit under that state’s laws and apply for federal and state tax-exemptions.
Once you decide the best business entity for you and your business you are ready to make the next step forward in ensuring that your creative and technical content is protected. Many types of creative and technical content are protected by one of the four types of Intellectual Property Law: copyright, trademark, patent, and trade secret. Whether you’re reusing content or trying to protect your content and ideas, it’s critical that you understand which types of Intellectual Property might be in play. To learn more about this, and other important answers to legal questions you may have about starting your business check out “Don’t Panic: A Legal Guide (in plain English) for Small Businesses & Creative Professionals“.
Art Neill is the founder of the legal services non-profit New Media Rights and a law professor, specializing in the areas of Internet, intellectual property, privacy, and media law. Teri Karobonik is a former Staff Attorney at New Media Rights where she worked with all manner of creative individuals on a daily basis on preventative, transactional and pre-litigation matters. In 2015 Teri was appointed as an Internet Law & Policy Foundry Fellow in recognition of her work as an early career leader in the tech law and policy space.