By Nikki Nelson, Customer Service Manager, BizFilings
One of the major considerations faced by business owners is whether to register their business.
This was a key finding of the BizFilings Small Business 2020 Survey, which surveyed nearly 600 current and future small business owners across various industries to gain insight into their motivations for starting a business and the challenges they face beyond day-to-day operations.
Our survey reveals both practical and forward-thinking reasons behind the decisions to register a business. Most owners (60%) say they registered their business or plan to do so to ensure legal compliance with state, local, and other necessary regulations. A large percentage (45%) believe that registration inspires customer confidence, while 42% think registration gives the company a professional feel.
What does it mean to register a business?
Registering a business can mean many things (registering your business name, registering for tax purposes).
Almost a quarter of respondents of the BizFilings survey have registered their business as an LLC and 6% are registered as S corporations. Among those who plan to start a business, 40% say they intend to be a sole proprietorship, and 22% will operate as an LLC.
What is a sole proprietorship?
A sole proprietorship is the simplest structure to operate under when starting a business and the most popular. Among current business owners, most respondents report that they conduct business as sole proprietors (52%).
With a sole proprietorship, there is no separation between the assets of the business and those of the owner.
A sole proprietorship is not a statutory entity. You don't need a state statute saying you can form a sole proprietorship. You can operate your business as a sole proprietor by simply deciding to begin doing business.
What are the advantages to registering your business?
One of the main advantages of forming as an LLC or corporation is the separation between the owner and the business. A sole proprietorship doesn't have its own independent existence. Legally, there is no difference between a sole proprietorship business and its owner (the sole proprietor).
Both LLCs and corporations are independent entities. There's a clear separation between an LLC and its owner (called a member) and the corporation and its owner (called a shareholder). This provides limited liability for the owner (either the member or shareholder) that a sole proprietor doesn't have. In a sole proprietorship, the sole proprietor owns the business, and therefore is legally responsible for all the business's debts, obligations, and other liabilities.
Consider this example. You are operating your business as a sole proprietorship, and your business has breached a commercial contract or was non-compliant with business licensing or tax laws (or any other statute that has penalties). As a sole proprietor, your personal assets (such as your bank account or house) can be targeted in order to pay the debt or penalty.
Alternatively, if you form an LLC or a corporation, that legal entity owns the business and will be responsible for the businesses' obligations and liabilities. Neither members nor shareholders are personally liable.
Registration may also indicate how an owner views the growth potential of their business. Although a good majority of businesses operate as sole proprietors, switching to another business structure might be beneficial as profits increase. For those who start their business as a “side-hustle,” it can make sense to start as a sole proprietor and switch to another structure if they find they need liability protection.
What are some disadvantages to registering your business?
Doing business as a sole proprietor is simpler in many ways — ease of creation, no state paperwork, no separate tax filing, and few ongoing formalities. When you register your business, things get more complex.
Compliance requirements for LLCs and corporations vary from state to state. But, at a minimum, you will need to file for formation with the state agency in charge of business entities and pay an initial formation fee. Other obligations usually include needing to maintain a registered agent, filing annual reports, and paying annual fees to maintain good standing.
What is the best option?
Choosing whether to register your small business depends upon your unique situation.
There are many factors to consider such as the type of business you operate. Does your business run a higher risk of liability to your financial situation? According to our survey, the choice of business structure and registration status is largely impacted by how each owner and future business owner views their business and the need for liability protection.
Do you need outside funding? Financing can be easier to access as an LLC or corporation. If you plan to expand your business, registering it can afford liability protections as you grow. Also consider your exit strategy, registering your business can help ensure an orderly transfer of assets if you sell the business or leave it to your family.
For many small business owners, getting the advice of legal and tax professionals is probably a good idea. And using a legal services company like BizFilings to help with the compliance needs, regardless of the business structure, can also help relieve some of the pressures small business owners have.
Read the BizFilings Small Business Survey for more on our key findings.