Legal Form of Business

Selecting your legal form of business is not as daunting as it may sound. I am not a lawyer, but I will describe how I have used these legal forms of business and how this business evolved through them.

Starting Out

In 2017, I was looking for a new income stream because I knew a side gig I was doing was going away. I was introduced to someone who would become my first bookkeeping client. I did not give any thought to what legal form of business I would use. Thus, by default, I was a sole proprietor. 

Since I provided professional services to this client, they prepared a 1099 for me at the end of the year, using my name and Social Security number, and I reported that income on my 1040. Thus, my business was reported on Schedule C to the IRS. 

In this form of business, I was personally liable for all the business’s debts. I was fine with this structure for two years. In two years, I had grown from one client to nine and started thinking bigger.

Then, Formed an LLC

At this juncture, I decided to create a limited liability company (LLC). Essentially, I felt like I could grow the business if I focused on marketing, and my goal was to start hiring. Thinking bigger, I felt I needed better legal protection. 

At this time, I created a business name and applied for an Employer Identification Number (EIN). This helps protect your Social Security number because you no longer have to share that with clients.

I then started marketing by joining different networking groups and was hired for the first time. This required me to focus on standardizing processes as much as possible. Here is the website of the IRS where you obtain an EIN: CLICK HERE.

Then, I Elected S Corp Status

Generally, as you achieve a level of revenue where it makes sense to elect S Corp status, it is essential to note that this is an IRS tax designation, not a legal form of business. This designation requires you to run a payroll. 

Your CPA can help determine whether your revenue level warrants this status. If you do apply for it, here is the IRS form you will need to fill out: CLICK HERE. Having this designation status with the IRS can help you save money on FICA costs (the self-employment tax applied to all net income). Click here for an S Corp Calculator.

Legal Form 4: Non-Profit

In the evolution of this bookkeeping business, one thing we have considered is starting a non-profit because many small businesses cannot initially afford a bookkeeper or CPA. However, at this time, that is not a direction we are taking because the Small Business Administration (even though it is not a non-profit, it is a government agency) offers many free or low-cost startup resources. 

A non-profit has many different accounting rules, so if you start one, you do need bookkeeping support that understands this format. 

Legal Form 5: C Corporation

Currently, we have no plans to become a C Corporation. There are more reporting requirements here. We could be a privately owned company or a publicly traded one, but we have no plans to do so right now. 

Here is the thing to note, though: it likely goes through various iterations of legal business forms. For example, Microsoft was initially started as a Partnership. You could go directly to a privately held C Corporation, but you may likely begin as a sole proprietor. 

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Actions Steps

1. What do you think will be your legal form of business?
2. Do you have any concerns about sharing your Social Security number with a client? This will likely happen if you are providing services to clients.
3. Have you hit a certain amount of revenue that your CPA thinks you need to elect S Corp status with the IRS?