I am going to start this blog posting with an all-encompassing and very generalized disclaimer: everything I know about business structures and licensing was learned from a handful of books and internet websites. I am in no way an expert on this type of information, and as it has been told to us on several occasions, the best way to determine your ideal business structure is to consult a tax attorney and/or lawyer. 

Okay. Now that we have out of the way, let’s begin.  First and foremost, I will start by saying that we have actually flouted the very advice I just offered you. Despite the fact that several sources and contacts have mentioned using a tax attorney or lawyer to help in deciding business structure, Lorna and I have forgone that step. Although we would love to consult with an expert, we are not in a financial position to do so at this point in our business. I imagine it would take us several weeks of work just to pay for the initial consultation! So, whether this decision was unwise or merely practical, we decided to save the expert opinion until it is a more feasible option for us. 

In lieu of an expert opinion, I read a number of books and articles on the subject of business structures. Most of the information that I came across was fairly consistent, especially as it relates to freelancing businesses. The most useful book that I came across was published by a company called Nolo. The book, Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants was pretty easy and engaging to read; examples and “what-if” scenarios make it one of the more interesting law/tax books that I have ever come across. From what I can tell, Nolo actually publishes a number of small business start-up books, and as our business grows, I will probably return to them for more ideas and information. The IRS website also provides some good information pertaining to the topic of business structure (and their information is free!). 

Basically, all the information comes down to four options for choosing a business structure. These are 1) sole proprietorships, 2) partnerships, 3) corporations, and 4) limited liability corporations (LLCs). Each of these has a number of pros and cons depending on company size, income, and location; rather than merely regurgitate the information you will find on any website or in any book on the subject, I am going to use this time tell you what we have decided on and why. We would love to hear your feedback about our decision and/or answer any questions you my have about our choice. 

Lorna and I are currently operating a business under the second category: partnerships. We are obviously not candidates for the first option, since there are two of us and we intend to split the profits of the company right down the middle. In most respects, however, a sole proprietorship and a generalized partnership are the same (except for the obvious additional owner). 

A generalized partnership is the bare bones of business structure. Our business license cost us a total of $20, and that fee included our company name, our city license, and a federal tax number. It is as easy as you can get tax-wise; at the end of the fiscal year, all of our company’s profits must be in Lorna’s and my pockets. We will then be required to include all of these profits as income on our personal tax returns, and we will pay taxes on that money accordingly. “The company” will be required to fill out a tax form, but it is my impression that the company is not required to do anything tax-wise beyond that step. 

While this sounds pretty nice and clear-cut, there are definite drawbacks to our current company structure. Because we did not choose a corporation or limited liability structure, Lorna and I (as well as our husbands) are personally responsible for any losses or lawsuits incurred by the company. In short, if we get sued, our lives and homes are on the line. While this may seem like a fairly far-fetched possibility for a freelance writing company, think again. We have already come across a client who wanted us to sign a contract that opened our company up to future lawsuits on their behalf. Although it would have been our company that was at fault, we would be personally vulnerable. That’s scary stuff. 

It was our original intention to start a limited liability corporation; as the name suggests, the owners are only held personally liable for the company to a certain degree. This type of business structure has all the appeal of safety that the general partnership does not, and both of our husbands put their vote here. However, the cost of starting an LLC was actually pretty high compared to a partnership. When starting an LLC, you are required to register with the Secretary of State—a step that incurs a number of fees, both up front and annually. The taxes are much more complicated, as the company is its own entity and must pay its own taxes. But one of the biggest drawbacks for this choice for us was that although Lorna and I would have been owners, we would be required to also be employees. As such, we would have to pay employment taxes such as L&I and Unemployment on our paychecks. You can imagine how much more trouble this would be for an HR Department that currently consists of me and the free checkbook the bank gave us! 

We also briefly considered forming a corporation. Like an LLC, personal liability for a corporation is much lower than it is for a partnership. However, a corporation also has those pesky tax issues found in an LLC. There is the added burden of having to have a Board of Members and an annual meeting. Granted, Lorna and I meet all the time, so having an official annual corporate meeting wouldn’t be the worst thing that ever happened; it’s just one more job to add to the growing list that Lorna and I are currently struggling under. 

I could probably go on for hours here about how we hemmed and hawed and changed our minds several times before finally settling on the generalized partnership business structure. And even now, our decision is not set in stone. It is our general consensus that the partnership is temporary, and that we will change to an LLC when finances allow. But since these finances include paying an accountant in addition to the initial fees, it may be some time before we are able to take this step.  

Choosing a business structure was one of those things that we assumed would be pretty easy. Although we were wrong (since we have actually spent quite a bit of time and energy on learning about the topic, let alone having to go through the motions of applying and paying for the license), I actually feel really good about what I learned in the process. Because taxes and laws are so intertwined when it comes to starting a business, I was forced to get my hands dirty learning about all those distasteful things that drove me to be a writer in the first place. It has also forced me to really pay attention to the contracts and non-disclosure forms that clients often request us to sign. Because we are so tied in to our company, we are motivated to always act in its best interest, asking questions and getting answers along the way. 

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