Choosing a Business Entity
Maybe you have just decided to start a new business, or maybe a hobby of yours has matured over the years to eventually make money. People come to you for your expertise, support or work and pay for it. Cash is easy to handle, but then you started accepting checks issued in your name and then PayPal payments linked to your personal bank account. Now it has grown beyond the point where you can so casually settle sales, and you’re thinking about formalizing your business. Should you start a sole proprietorship, a partnership, a limited liability company or an S or C company? This article discusses some of the pros and cons of choosing different business unit choices to help you decide which one works best for you. You can change it later at any time, but the process takes time, effort, and money. It is therefore best to plan ahead in the long term.
The simplest form of business is that you do the work yourself under your own name. It is called a sole proprietorship. You should consider your business income and expenses, but you can also combine the funds with your own. Save revenue for your expenses and keep track of your earnings. If your business is small, this is probably the best option, because there is little extra bureaucracy or bureaucracy – you do not need to register your business, you probably do not need a lawyer or accountant, and you can still take your business expenses as a tax deduction on your IRS Schedule C, as long as you make more profit than not.
If your product or service is taxable in the communities where you sell it, you may need to register with your state or local tax office to collect and transfer the sales and consumption tax on the goods and services you sell. Here in New York, you can deduct a tiny percentage of the sales tax you collect to compensate for the formalities and records you’ll be charged. If you perform value-added services for another person’s taxable goods, such as: For example, refining and reselling unfinished birdhouses, you can issue a “resale” certificate to your sellers so that you will not be charged sales tax on the intermediates you purchase for resale. If you buy an unfinished birdhouse for $ 10, you will not pay sales tax, but if you resell it for $ 20, you will have to collect and transfer the sales tax from the consumer. Remember that you are the consumer of the brushes that you use to paint or dye these birdhouses. You can deduct your income tax expenses from your profit, but you still have to pay sales tax on them.
There are several ways to start a sole proprietorship. As mentioned, the easiest way is to work under your own name and with your own social security number. If you prefer to set a separate name for your business (Doing Business as or DBA), contact your county clerk. If you prefer to set up a separate tax ID for your business (known as the “Taxpayer Identification Number”, “Employer Identification Number”, “TIN” or “ONE”), contact the IRS or visit its Web site at to receive the form. Setting up a DBA is usually chargeable, but a TIN or EIN is free. Once you have received the DBA documentation, bring a copy to your bank to open an account on behalf of the company. The sole proprietorship offers a number of benefits, including deductions for business expenses, and allows you to create a separately identified entity where you can conduct business while minimizing paperwork and keeping legal and accounting costs low. The disadvantage is that you are the company – there is no legal or financial difference between the company’s obligations and your own. If your product injures or harms your property while performing services, you are personally liable. If your company commits to financial obligations that it can not repay, creditors will track you personally.
The next instance to consider is partnership. In some ways, this is better than a sole proprietorship, but in other ways it is much worse. Basically, a partnership consists of you and one or more people working together to complete a business. They can each invest as much as agreed, work as much as agreed and take as much profit as agreed. In any case, it’s best to create a separate tax ID for this type of agreement and a doing business ace (rather than using a partner’s name). When you bring your DBA documents to the bank to open accounts, you indicate who has signature authority for the checks and how many signatures are required for each check. The big advantage of a partnership is that you can achieve more together. They share the management responsibility and have a greater source of capital than any one of them. The disadvantage is that each partner has full authority to commit the company to obligations for which each partner is jointly and severally liable. This means that your partner can subscribe to magazines, sign up for a mobile rate, or take out a loan. If he does not pay anymore, the creditors can come after you for the money. If your partner disappears, it’s much easier for him to make a judgment to save your savings, to decorate your wages or to mortgage your property than to your absent partner. On the other hand, it is often difficult to find a good help. If you and two friends want to start a deli business together, it can be more encouraging for each of you to work as a partner and to share in the profits, rather than one of you employing the other two as hourly employees.
The next category of companies, including corporations and limited liability companies, is a bit more complicated. It goes back to early British seafaring. Wealthy investors sponsored ships to find resource-rich new territory. If the expeditions went well, the ships would return with gold, spices or slaves, but if the expeditions went bad, the ships would be lost at sea and all hands drowned. The investors rarely started these adventures themselves, but hired crews. When the ships returned successfully, the crew was paid and the investors took their cuts from the profits, but as the ships sank, these investors did not want to be sued by the crew members’ families for the loss of their family, which won the bread. Thus, limited liability companies were founded. Investors were able to buy and sell shares in the company, and although their profit potential was theoretically unlimited, their liability for losses was limited only to the amount of their investment. The company could mismanage its ships, its property and other assets, rendering worthless the ownership, or the company could be sued by families of lost crews and required to pay off all its assets, but in no case would investors need to not to take more than they have already invested. The limited liability company was treated as a separate entity from the investors – a fake person. In fact, that easily means what companies mean.
The most important thing about this category of companies is that these types of companies are legally and financially separate from the people they belong to. This category isolates its owners from the financial and legal obligations of the company. If the company owes more than it earns, the owners are not personally liable. If the business injures or damages property, the owners are not personally liable. However, there is a limitation: just setting up one of these business units does not give you this protection. They are responsible for the continuous compliance with the “business formalities”. For example, if a plaintiff can prove that you routinely mix business cash with your own, pay for certain business expenses personally, or have the company pay for certain personal expenses, they may be able to convince a judge to “puncture the corporate veil” and treat you and the business equal. It is up to you to keep proper records, to maintain proper financial accounting, to use corporate funds to settle corporate debts, and to hold and formally document annual board and board meetings, even if you are the sole shareholder and sole director.
In addition to the additional effort, the creation of a company veil costs a little more than the founding of a company outside the company. You will probably need a lawyer, and you may also want an accountant. Talk to them to find out which type of business unit is best for you. The company may have a different name than the owner (s) and should have a separate TIN or EIN. You will receive a kind of submission certificate from the Corporate Department of your state – this may be called a “statute” or “statute” – and instead of the DBA certificate used for a non-corporate body, this is the document you need To open bank accounts in the company name.
The profits of a company are not necessarily the profits of its owner. It’s up to you how you want to handle it. This is one of the other big benefits of starting a business: better control over corporate finances. For a sole proprietorship, the remainder of the profit after deducting costs is self-employment taxable and since taxes, social security or Medicare have not been withheld, you must pay for it yourself. In a business unit, the directors and officers (ie, you) decide how to handle the corporate profits. You can pay it to the directors and other employees (and be responsible for the associated income taxes), you can reinvest it to expand the business, or you can distribute the profit to the shareholders (which leads to lower tax obligations). There are three such companies that we address here: the C Corporation (also referred to as the “C Corp”), the S Corporation (or “S Corp”), and the Limited Liability Company (LLC).
The traditional society is the C society. Most of the big names you know are C corps: Proctor & Gamble, Coca Cola, IBM, Frito Lay, Microsoft and McDonalds. C corps can have a virtually unlimited number of shareholders who can be individual citizens, foreigners or other companies. The shares may be held by a few individuals or publicly traded, for example, on the New York Stock Exchange. C companies have extensive accounting and financial obligations, and since every business is treated like a fake person, it pays taxes on its own income. Some companies, such as Microsoft, do not pay dividends and effectively reinvest their entire profits. However, most small business shareholders prefer to cut their profits and are then responsible for paying income tax on the distributions they receive. This leads to double taxation, whereby the company makes the profits it receives from corporate income tax and the shareholders re-tax that profit on distribution.
To avoid this double taxation, you might want to start one of the other business units. There are some restrictions on who owns a S-Company. However, if your company qualifies, the company’s profits flow through and are taxed only once on the tax returns of its shareholders. To start an S corporation, you must first set up a regular C body and then apply to the IRS and your state tax office to be treated as an S corporation. S companies have been around for a long time, and they have been sued and sued enough to set a legally appropriate precedent. If you are unfamiliar with the concept, the US legal system works primarily for precedents. Instead of reinventing the wheel over and over again, if you’re in court for circumstances materially similar to a previous lawsuit, your lawyer will quote the previous case, and the judge is likely to make a judgment comparable to the way it was done is how the previous judge decided this case.
This is one of the main differences to a Limited Liability Company (LLC) – it is a comparatively young business entity for which not so many legal precedents have yet been created. So far I have been told that judges seem to pay the company the same respect as S-Companies, but without such extensive jurisdiction it is not impossible for a judge to make an unexpected, inconvenient decision which itself sets a precedent for other judges to follow. Two other differences are that an LLC must have a company agreement and meet the publication requirements. The works agreement is a simple document that you can create yourself and that describes some basic facts about the company and its relationship with its members. Search online for samples or buy a template from a lawyer or legal form provider. The publication requirements vary depending on the community. However, if you have ever considered these legal notices in the headings of your newspaper, people will post those ads. In New York, LLCs must issue such advertisements in a daily and weekly publication, each approved by the local County Clerk, and submit a form and fee to the Department of State with copies of the two affidavits from The Newspaper.
I am not a lawyer and I am not 100% clear about the other differences between a S-group and a limited liability company, but since I have one, I will give you my impression. As far as I know, a company is more suitable for a company in which you actively provide a service or sell a product, and an LLC is more suitable for a passive business, such as a landlord. If your lawyer tells you otherwise, you should probably follow his advice, although it may be wise to check if he has more experience with one type or another, and advise you on his preference rather than your circumstances , You may also want to check out some of the inexpensive online lawyers who can help you set up LLCs or businesses. We use mirrors & Utrera.
Brian Blum is the founder, president and chief consultant of Maverick Solutions IT, Inc, a technology consulting firm that started out as a sole proprietorship and evolved into an S-group. Brian is also Founder and Operations Manager of Maverick Structures LLC, a real estate investment and management company. Decades ago, Brian got his first taste of big business with just one local paper route, and now he owns Google – or at least an insignificant part of it.