It’s so exciting when you decide that something you love doing is going to be a business, but there are tasks you’ll need to complete if you want to form a “real” business.
I can remember when I first started exploring this topic, and I would feel my brain sort of glaze over and shut down.
I don't care about setting up a business.
I just want to make cookies!
And the truth is, you really can just call it a business and leave it at that. Many people do it.
It all depends on your own unique situation and the goals you have for your business. You may not have plotted out any goals beyond the short term of just starting to sell your cookies. Maybe you’ve never imagined a time where you take over the world with baked goods.
You’re just starting out. Your goals will evolve over time, so who knows where you might want to take the business down the road.
BUT I will say this……
If you do decide to take the steps to formally establish a business, you’ll find that something pretty powerful happens internally. When you make it official, you immediately take yourself a lot more seriously, and this affects everything you do.
Forming a business does 3 things:
- Gives you an immediate boost of confidence and sense of accomplishment
- Legitimizes your business with customers & the public
- Expands your business opportunities
– – – – – I want to elaborate a bit on Point #3 – – – – –
If you have the goal of selling your cookies at a large organized event or perhaps a farmer’s market, those venues most likely would require information like a Tax ID number as part of the registration (Rules vary by state). You will be very limited in what you can do if you are not recognized as a legitimate business.
Even if you’re not thinking about setting up a business now, I would suggest reading this through in case you decide to pursue it in the future.
How do I set up a business?
The topic of “How to set up a business” is an expansive one, and you can go down the rabbit hole for hours once you begin online research in this area. I am not attempting to provide in-depth analysis and instructions on setting up a business, but I am offering an entry-level overview of what you need to understand. Included are some links to articles and websites that offer really clear, organized information and can help you dig further into the details.
I am writing this for the person aiming to set up a small business.
Not just the generic term “small business”, since technically a small business can actually be pretty big, but I’m referring to setting up a “really small business”. Your cookie business.
In the world of “really small businesses”, there are 2 ways to go:
1) Sole Proprietorship
2) Limited Liability Company (LLC)
1) The simplest business form: Sole Proprietorship
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business. (A partnership is the same except with 2 or more people as partners.) This business type is unincorporated.
Before moving on further, it’s important to understand the difference between the terms “unincorporated” and “incorporated”.
I know this is where the brain starts to fog over, but stay with me…..
An Unincorporated company describes a business that has not been legally registered as a business with the relevant state authorities. Unincorporated companies are not distinct from their owners – this is a legal way to say that your unincorporated business is YOU. A person. This is why you would be personally liable for all financial obligations related to the business, and can be personally sued over a business matter. Unincorporated businesses are simple and inexpensive to set up and run, and income is reported on one’s personal income tax return.
An Incorporated company, or corporation, is the resulting legal entity that separates a company’s assets and income from its owners. An incorporated business has gone through a process to be declared legally separate from its owners. This is a legal way to say that a corporation is its own legal entity, it is not people. Owners of a corporation are not personally liable for financial obligations or lawsuits related to the business. Corporations are costly and complex to set up and run, and incur higher taxes. Larger small businesses all the way up to the world’s largest companies exist as corporations.
Now back to what we started discussing, which was the sole proprietorship…..
A sole proprietorship is an unincorporated business.
This article provides a very good summary of the sole proprietorship, and guidance on setting one up:
2) Limited Liability Company (LLC)
The second business form commonly considered for starting a “really small business” is the Limited Liability Company. If you make a point to notice the full names of businesses that you’re coming across either through promotional media or just being out and about, you’ll notice that many of them end with those 3 letters, LLC.
Please note that the “C” is not for “corporation” – it’s Limited Liability Company.
I’ll give you one guess at the LLC’s main benefit ….. it’s the phrase limited liability.
As mentioned above, the sole proprietorship’s main shortcoming is that your company is YOU, and you are personally liable for whatever issues arise with your business. If your business failed and you needed to declare bankruptcy, then it would be a personal bankruptcy.
The Limited Liability Company is a hybrid of the sole proprietorship and the corporation forms of business, offering the small business owner the most valuable aspects of each one.
Definition: Limited Liability Company (LLC)
An LLC is a flexible business form that blends elements of sole proprietorship and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a sole proprietorship is the availability of pass-through income taxation (personal tax return). It is often more flexible than a corporation, and it is well-suited for companies with a single owner
This all sounds pretty great, but you don’t get the best of both worlds for nothing. While it’s not terribly difficult to set up an LLC, compared to a sole proprietorship it takes a lot more effort and comes at a greater expense.
Limited Liability Companies are set up with a specific state, and every state has their own set of formation requirements and fees. The state filing fees vary wildly, from a low of $40 to a high of $500. Some states require additional steps that add to the cost. You can hire a professional service to handle the entire process for you, otherwise you’ll have to manage the paperwork process yourself. You’ll have to make an investment of time and money, or less time and more money if you outsource this task.
Below are 2 great articles about LLCs:
Now that we’ve looked at both the sole proprietorship and the LLC, here is a good article that discusses the pros and cons of each.
"But I just want to make cookies!!!"
If that’s how you’re feeling after reading all the way to this point, I know exactly what that’s like because I went through the same thing. Try not to get discouraged.
I want to re-state here that there is in fact a very simple and inexpensive way to start a “really small business”, and that is the sole proprietorship. A huge number of businesses operate in this form, and it’s great to have such an accessible option.
Many business owners start out at the very beginning as a sole proprietorship to test the waters, and then form a Limited Liability Company once they have more confidence and the business is growing. This is a smart approach. Walk before you run.
Educating yourself about all of this BEFORE you get going is what’s most important.
And then you can get back to doing what you want to do, which is making your cookies.
If you feel like really digging into this, below are links to some great articles that will help explain things in more detail.
Before you click away, take a quick look at all the different business structures that are discussed in these articles:
