Have you had enough? Are you done working for someone else, and making someone else rich? Do you have the skills to do the work and spend the time required to run your own business?
It may be time to get started.
So you sit down at your computer and get ready to register with the IRS. You start to register your business, and they ask you to choose the type of business entity.
And the option for “one that makes me a lot of cash” isn’t on the list.
So you stop and ask yourself, “Seriously, which one of these do I choose?”
Let’s run through the different types you could choose. Keep in mind that this is just a primer, and more posts about each of the forms will be coming.
The first one you could choose is a sole proprietorship. This basically means that you are working by yourself. You can have some employees, but you are the only owner. You have complete control over everything, and get all of the income.
It the easiest to form, but it does come with some disadvantages. If you get into trouble with a client, and they sue you, they could take all your personal assets. That includes your house, your car, and everything else you own. Additionally, when you die, so does your business, so it can’t be passed on to your kids (or anyone else for that matter).
In addition, you will owe self-employment taxes. When you worked for someone else, your employer paid employment taxes on what they paid you. As the owner of your own business, you will have to pay not only your own payroll taxes, but what would be considered your employer’s portion as well.
You would consider this form of business if you are just starting out, want something simple, and aren’t very concerned with liability protection.
Limited Liability Corporation
So you want to keep it simple, but want a little more protection. A limited liability corporation would give you some limited liability protection, meaning that if you get sued, you won’t lose your personal assets. You also don’t have as much paperwork as other forms. And like a sole proprietorship, you also get all the profits.
You face the same disadvantages you would if you had selected to be a sole proprietor. However, you do get some liability protection, as choosing this form gives you some liability protection by separating you from your business.
This form is great because it is simple and provides some liability protection. You would still want some insurance all the same since you never know when a customer may decide you did them harm, or an employee does something that hurts a customer.
Let’s say you found someone who compliments your talents, and you decide to go into business together. A partnership is easy to form, as well as inexpensive. You also get to share the financial burden with someone else.
However, the downside is that you are personally liable for not only the debts you incur for the business, but any that your partner incurs. So if you go into business with someone not so trustworthy, they could rack up a large amount of debt, and leave you with the responsibility to pay it off. Be sure that you not only find someone trustworthy to go into business with, but talk with a lawyer to draw up a partnership agreement that protects you and your interests.
A corporation is what a lot of people think of when they decide to go into business. While the other business forms need to be looked at when setting up your new venture, there are several advantages to setting up a corporation. The biggest is that you have limited liability, with your personal assets protected from any lawsuits filed against the business. It is also easier to obtain operating cash, since you can sell stock to bring in funds. There are some tax advantages, such as lower tax rates than the other forms.
The disadvantages to the corporate form is that it is very expensive to form, and the paperwork can be overwhelming. The record keeping to stay in compliance with the regulations can be quite a burden. Additionally, the earnings are taxed twice. This means that taxes are paid on the earnings of the corporation, and then the dividends paid to the shareholders will be taxed.
You would choose this form of business if you were expecting that you would want to grow your company with outside funding, and have the maximum amount of liability protection provided by a form of business. In addition, you aren’t fazed by the amount of paperwork you need to do.
Lastly, there is the S-Corporation. This is a special kind of corporation, but instead of the taxes being levied on the corporation, the items of income and loss are reported on the tax return of the shareholders. It does have the advantage of being exempt from federal taxes, with the earnings of the corporation being taxed on the shareholder’s return. However, like the corporate form, there are regulatory requirements, as well as shareholder compensation requirements that might make this form unattractive to someone starting a company.
You would choose S-Corporation status if you had less than 100 shareholders and wanted the advantages of being a corporation.
Choosing the right form for your business can be confusing and stressful. Drop me a line at firstname.lastname@example.org so we can discuss the right one for your business.