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Sole Proprietor Only single-owner businesses can be sole proprietors. Most small-business people begin as sole proprietors because it's cheap, easy, and fast to establish. All you really have to do is go down to your local county/state clerk's office and apply for a DBA (doing business as). This is usually a small fee (about $20 or so) to do. And you may need a state/federal tax ID number as well, which you can get after you get your DBA. Other advantages of sole proprietorships are that there are some tax advantages for this type of entity. Corporations have to pay taxes on the profits of the business as well as the owners have to pay taxes on their personal salaries, so there is a double-taxation. With sole proprietors, the business owner and the sole proprietor are treated as a single entity, so business income/loss are reported on the owner's federal tax return (Form 1040, Schedule C); therefore, there is only a single-taxation. The main disadvantage of a sole proprietor is, however, that the owner and the business are, in essence, the same. Meaning, if the business goes down and people try to sue the company, the owner is personally liable for everything, so upset customers can come after the business assets as well as the owner's personal assets, like his or her home. For this reason, businesses with high risk to injury or something similar should lean towards either an LLC or corporation. Partnerships A partnership is virtually the same as a sole proprietor, with many of the same benefits and disadvantages, but it involves two or more persons. Like sole proprietors, partnerships share the responsibility of the business. The main key to an effective partnership is to spell out everything, in writing, about every element of the business. Everyone knows someone that has been taken advantage of in a partnership. Make sure you spell out very clearly the parameters of the partnership: that is, who's responsible for what kinds of decisions, who has final authority if you disagree, what happens if one partner isn't living up to the expectations of the other, and how much money each partner takes home. There are two main types of partnerships: general partnerships and limited partnerships. General partnerships share all responsibilities of the business. Limited partnerships consist of one general partner, and the other partners are limited partners. The benefits of a limited partnership are that the general partner has the freedom and flexibility to run the business as he/she wishes, and the limited partner is protected if something goes wrong. LLP/LLC This is one of the most popular business structures for small businesses for those that don't mind a little extra paperwork. If you want your business to have the tax advantages and flexibility of a sole proprietor or partnership, while keeping yourself from the liabilities that both sole proprietors and partnerships have, you would want to form an LLP or LLC. An LLP is a Limited Liability Partnership and an LLC is a Limited Liability Corporation. Like a corporation, an LLP/LLC offers its members separate legal entities from the business, meaning the owners' personal assets are not liable, like in the other structures. This type of entity also incurs single-taxation, unlike corporations, which have double-taxation. Forming an LLP/LLC will cost more to set up in you local state, but each state is very different, ranging from $30 to $800. To form an LLC, you would need to do the following: 1. Choose a business name. S Corporations Like LLP's and LLC's, S corporations have similar tax advantages (single-taxation), compared to C corporations. You personal assets are also not liable to be taken in an S corporation. Therefore, there are some main advantages, but there is more paperwork to do in forming an S corporation than there is in the other legal structures discussed above. The specifics of S corporations
are the following: S corporations can have no more than 75 owners,
can issue only one class of stock certificate, and can only have
U.S. citizens, estates, charitable organizations, and employee stock
ownership plans and certain trusts as shareholders. For a good site on incorporating your business, go to www.incorporate.com. For a great checklist on incorporating, see the following article by clicking here. For a good S corporation article, click here. C Corporations These are beneficial business structures for those that wish to be a separate entity from the business, so personal assets are protected, like in LLP's and LLC's. However, they incur a double-taxation, meaning that the owners must pay personal taxes on income received from the company, and the company itself must pay taxes on the profits of the business. The specifics of C corporations are the following: C corporations can have an unlimited number of owners, can issue different classes of stock, and can have individuals, other corporations, trusts, estates, and foreign investors as shareholders. To set up a C corporation, the owners must file Articles of Incorporation and bylaws within their states, form a board of directors, issue stock certificates, pay organizational taxes and filing fees, and require employer identification numbers from the IRS. For a good site on incorporating your business, go to www.incorporate.com. For a great checklist on incorporating, see the following article by clicking here. For tips on minimizing the tax exposure of a C corporations, see the following article by clicking here. Nonprofit organizations These are organizations formed to carry out a charitable, educational, religious, literary, or scientific purpose. Nonprofit organizations don't pay any taxes on profits they make. Therefore, there are many tax advantages to forming a nonprofit organization. The domain name for a nonprofit would usually end in .org. |
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