There are two main types of legal entities one can become when opening a business. One is an LLC, which stands for limited liability company. The other is S Corp which stands for S Corporation. There are other variations but these are the two main types. There is also a Sole Proprietor, which is when a business is owned by one person and that business and the person are seen as one in the same. Erik typically doesn’t recommend someone become a Sole Proprietor because if the business is ever sued the business owner can also personally be sued.
Erik has typically always formed his businesses as an LLC. There are many advantages to being an LLC. The biggest advantage is that it separates the business owner from the business itself so if the business is ever sued it doesn’t mean the business owner will personally be sued. They can take every last dime of the company’s but it doesn’t mean they will be able to go after the business owner’s personal home, car, or assets. The other advantage is that with an LLC the business owner files personal taxes and the LLC is part of those. There is no need to file separate taxes.
The S Corp is also a popular option. One of the advantages of the S Corp is that you can have shares of the company. This is good if there are multiple business partners. The other advantage is that you can have partner distributions in addition to payroll. Distributions are taxed at a lower rate than payroll so you can work that to your advantage. Keep in mind the IRS requires you to also pay yourself a reasonable payroll amount so it can’t all be distributions.
There are several other entity types but these are the two main ones and the two Erik recommends. If you have questions about the different entity types or special circumstances, Erik recommends you talk to an accountant about which type is best for you.