Choosing the Right Entity Type for My Business

Whether you’re making $30 bucks running a lemonade stand or $450,000 as a freelance creative director…congratulations, you’re a business owner! And with the great power of running your own business and being the master of your own schedule, comes great responsibility. Here at Brooklyn FI, we help hundreds of business owners understand their business cash flow and make plans to help reduce their tax burden.

One of the most common questions we get here is “Do I need an LLC and will it help me pay less in taxes?” Unfortunately, the LLC is one of the most misunderstood concepts in the small business world because it actually has little to do with HOW you pay taxes at all, or even how you structure your business. A Limited Liability Company (LLC) is a legal wrapper that separates business activities from your personal activities. If someone gets violently ill from your poisoned lemonade at Betty’s Lemonade Stand and they sue you for a million dollars, as a business owner, your personal assets could be exposed. That means a judge could order that you use your personal assets (your house, your bank accounts, your investment accounts) to pay those damages. With an LLC, there’s some protection there, and ONLY the assets of Betty’s Lemonade Stand, LLC could be seized. The assets of Betty’s Lemonade Stand, LLC might be as small as a bank account with $200 in it and a storage room full of solo cups and sugar. That’s an oversimplification of course, but hopefully, you get it. Even with that LLC protection, you still have to decide HOW you want that LLC to be taxed.

There are generally four common types of entities to choose from which will impact how you are taxed: