Legal, Licenses & Insurance

The Entity Cost/Benefit Worksheet

Companion to "The entity decision is a cost/benefit call."


The entity choice is a purchase: a liability shield from your state, with a one-time price and an annual price. Write the numbers before the feelings.

The four numbers, one line

Before you form anything, write four numbers on one line: your state's filing fee, your state's annual fee or franchise tax, the late-penalty amounts, and what your first year of revenue actually is. The entity decision is that line.

NumberYours
1. State filing fee to form an LLC (national range runs about $35 to $500; for example Kentucky about $40, Massachusetts $500)$
2. Annual fee or franchise tax (annual obligations run from $15 to $800; California charges $800 a year even with no income and no business activity)$ / yr
3. Late-penalty amounts (for example California's $250 late annual statement)$
4. Honest first-year revenue$
Annual fee as a share of first-year revenue%

The decision lines

Sole-prop start: annual fee is a meaningful fraction of expected first-year profit and risk is low. A defensible, common choice; the entity is a decision you are allowed to make twice☐ chosen, date
LLC now: signing contracts with real damage potential, or a contract or client requires it. The fee is cheap insurance at that point☐ chosen, date
Partner involved: two or more people cannot be a sole prop; partnership is the default with joint personal liability. One hour of a lawyer's time before the first client☐ N/A ☐ lawyer booked

The five upgrade triggers (from sole prop to LLC)

A commercial contract requires an LLC or proof of insurance☐
Physical work on other people's property, at scale, with real damage potential☐
You hire your first employee☐
Revenue is consistent and the annual fee stops feeling like a cost and starts feeling like insurance☐
You are about to sign a personal guarantee you would rather the company carry☐

What the shield does not cover

Your own negligenceThe LLC protects the owner's wallet from the company's debts; it does not make you unaccountable for your own hands
Personal guaranteesLoans, commercial leases, and business credit cards for a new company typically require the owner's signature
ComminglingPaying groceries from the business account can get the veil pierced; separate account and clean books are not optional extras

S-corp note

Not a company you form; a tax election on IRS Form 2553, signed by all owners, deadline no more than 2 months and 15 days after the start of the tax year it takes effect (or any time during the preceding tax year). Operator consensus from their accountants: look at it around $50,000 a year of net profit, not before; payroll filings and accounting costs eat the savings at small numbers. Raise with a CPA, not a rule.