So, you’re ready to start a business. But are you really ready? Do you know what business form you’ll use?
Suppose you haven’t already decided on which form your business will take. In that case, that’s one of the first major steps to starting your own business.
Don’t take this step lightly. The business form you choose will determine how you’re taxed, the costs you could incur, and your legal protections.
Three main types of business structures exist – sole proprietorship, LLC, and corporation.
Sole Proprietorship
A sole proprietorship is most common for individuals who work from home or run a small business alone. It is an unincorporated business and a disregarded entity, which means the IRS doesn’t recognize it as separate from the owner.
The owner reports their income and losses on their personal tax return. You can choose a DBA, or “doing business as’ name that is fictitious and separate from your own name. It cannot contain terms like “LLC,” “incorporated,” or “corporation,” since you aren’t any of those legally.
This business form is usually the cheapest and easiest to set up. There are no filing fees, and you can use your SSN or sign up for a free EIN (employer identification number) through the IRS to do business.
However, all business liabilities fall directly on the owner. If you’re a hairstylist and a client slips and falls in your home salon, they can sue the business. Since you’re a sole prop, that means you’re liable personally.
Limited Liability Corporation (LLC)
Some sole proprietors choose to set up a single-member LLC, which provides legal protection that a sole prop does not. But an LLC is also available for businesses with multiple owners or a corporate hierarchy structure. The owners, officers, and directors receive personal protection against legal and financial company liabilities under an LLC, even if they are negligent.
There is a state filing fee to incorporate in Maryland. Depending on how you run the business and if it crosses state or country lines, there are other fees to factor in. It’s essential to understand what forms the state requires and what actions require additional filings to stay compliant. You will also need to file an Annual Personal Property Return.
There are tax considerations that LLCs need to take into consideration. One concern is the number of Members an LLC has. If you are a sole member LLC, you should be able to file the LLC business return as a Schedule C attached to your personal 1040 Income Tax Return. In this situation, profits and losses are reported on your Tax Return. If your LLC has 2 or more members, then you will need to file a Separate Business Return and issue K-1s for profits and losses. There could be additional state or local taxes assessed.
Corporation
A corporation has a hierarchy of stockholders, directors, and officers. One or more stockholders are the owners and manage the directors they elect. The company, like an LLC, protects each individual legally, including personal negligence.
If you are a small business, you will need to file an additional form to elect S-Corp status. If you fail to make this election timely, you will be a C-corp for the first couple of tax years.
As to tax returns, there is no option to file the tax return as a Schedule C. Rather, the business will need to file its own tax return. If you are an S-Corp, a K-1 will issue for profits and losses. If you are a C-corp, things get more complicated with profits and losses. The C-Corp will also be taxed while an S-Corp, the taxes pass through to the shareholders.
Requirements can vary, as can filing fees. Owners must have stock certificates as shareholders and form a board of directors. A sole owner corporation will most likely be the President, Treasurer, and Secretary. You will also need to hold an annual meeting and make sure there are proper minutes by the Secretary.
Certain corporations must register with the Securities and Exchange Commission (SEC) to issue stock shares. For small companies and businesses, there may be no requirement necessary, but it is an additional consideration.
Weighing Your Options
Each of the above business entities have its advantages and disadvantages. Some disadvantages can be resolved with proper insurance and understanding your risk. There is also tax advantages available for S-Corp that are not available for LLC.
Ensuring You Choose the Right Business Form
As you can see, choosing the correct business form takes some serious thought and understanding. Working with a business coach and attorney can help ensure you select the right type of organization and teach you how to navigate getting set up and running the business. If you’re ready to take the leap, contact Coach Tim Mummert today to schedule a consultation to learn how business coaching with an established attorney can help you start your business on the right foot.