Forming a business is a significant step for any entrepreneur, and structuring it correctly can mean the difference between long-term success and unforeseen liabilities.
In the recent webinar, “Structuring Your Entity: Best Practices in Small Business Formation,” Anthony Gibbs of CSC and Chris Van Leeuwen of Insurance Canopy explored the crucial considerations small business owners must make when forming and protecting their businesses.
This webinar offered an in-depth look into entity types, their tax implications, liability risks, and the insurance strategies necessary to safeguard a business.
Getting Started With Business Formation
Starting a business takes more than just a great idea — it requires a solid legal foundation. Gibbs kicked off the discussion by explaining the basic timelines and considerations for incorporating a business:
The first thing to consider is the business’s growth trajectory. If you plan on bringing in partners or passing the business down to future generations, that will influence which structure you choose.
These considerations help determine which entity type is the best fit. If you plan to bring in new partners or sell the business, setting up a corporation may offer more flexibility, whereas a limited liability company (LLC) might be better for a sole proprietor with fewer long-term structural needs.
Anthony emphasized, “It’s always best to think about the long-term vision for your business when deciding on your initial structure. Waiting too long to incorporate leaves you vulnerable to personal liability.”
Choosing the Right Business Structure
Anthony gave an overview of the most common business structures: sole proprietorship, LLC, corporation, and partnerships. Each of these has benefits and drawbacks depending on factors like liability, taxation, and ownership flexibility.
LLCs are by far the most popular option for small business owners. They offer the simplicity of pass-through taxation, meaning the business’s income and expenses flow directly to the owner’s personal taxes. This reduces the complexity of filing separate business taxes while still protecting the owner from personal liability.
He also noted that LLCs are particularly advantageous for service-based businesses, such as consulting or freelancing.
On the other hand, corporations have a more complex structure. “Corporations offer the benefit of raising capital through shares,” Anthony explained. “This makes them a better fit for businesses that expect to bring on investors or go public eventually.”
However, corporations face double taxation — both the business and the shareholders are taxed, making them less ideal for small, single-owner businesses.
Anthony also touched on common mistakes he sees when business owners select their entity type.
One of the biggest mistakes is forming an entity in a state like Delaware or Nevada when your actual business is operating in a completely different state,” he warned. “This opens you up to having to pay taxes in multiple jurisdictions.
Key Tips for Structuring Your Business
- For most small businesses, LLCs offer a good balance between liability protection and simplicity.
- Corporations are ideal for businesses seeking outside investors or planning to grow significantly.
- Avoid forming an entity in a state where you don’t do business just because of favorable tax laws — it may cost you more in the long run.
Protecting Your Business Through Insurance
The next critical step is protecting your business through insurance. Chris Van Leeuwen, Insurance Canopy’s Vice President of Professional Development, emphasized that no matter how small your business is, it’s essential to have insurance in place.
The reality is that anyone can get sued at any time, and your business structure alone won’t protect you from all types of risk.
Van Leeuwen discussed the key types of insurance every business owner should consider, starting with general liability insurance. “A general liability policy is a must for any business,” Van Leeuwen explained. “It covers third-party bodily injury, property damage, and legal defense costs.”
He also stressed the importance of matching your insurance policy to your business structure. “If you’ve formed an LLC, the insurance needs to be in the business’s name, not your personal name,” Van Leeuwen advised. “This ensures that your personal assets are protected if the business is sued.”
Another critical consideration is workers compensation insurance, according to Van Leeuwen. “Even if you’re a solo business owner, you might need workers’ comp if you’re injured while working, and if you hire employees, this coverage is a legal requirement in most states.”
One of the most compelling points Van Leeuwen made was about planning for the future:
If you expand your business or take on new products, your insurance policy needs to evolve with it,” he said. “A pivot in your business model can expose you to new risks, so make sure your insurance professional is aware of these changes.
Key Insurance Takeaways
- General Liability Insurance is a must-have for any business, covering lawsuits, injury claims, and property damage.
- Make sure your insurance policy is under your business entity’s name to protect personal assets.
- Regularly review and update your insurance coverage as your business grows or pivots.
Webinar Takeaways
The webinar provided a wealth of practical advice for entrepreneurs and small business owners looking to form, grow, and protect their businesses.
- Choose the right structure early: Whether you’re considering an LLC or a Corporation, it’s essential to think about the long-term vision for your business. Gibbs stressed the importance of incorporating early to protect yourself from personal liability.
- Consider liability and taxation: Each entity type has different implications for liability protection and taxation. LLCs are often a good fit for small businesses, while corporations are ideal for businesses with more complex needs or plans to take on investors.
- Protect your business with insurance: Chris Van Leeuwen highlighted the importance of general liability and workers’ compensation insurance for all business owners, regardless of size. Make sure your insurance matches your business’s legal structure.
- Regularly reassess your insurance needs: As your business evolves, your insurance should too. Ensure that you’re protected as you add new services, products, or employees.
This webinar underscored the need for thorough planning and careful consideration when it comes to structuring and protecting a business. For entrepreneurs, taking the time to understand entity formation and insurance is a crucial investment in long-term success.
