Proprietorship? Corporation? What the heck am I supposed to do here?
Starting a new business can be exciting! You have this great idea and you are pumped. But then someone says to you,
“So, are you going to incorporate or be a sole proprietorship?”
Huh?...
I was just going to open shop and start selling stuff.
If this would be your response, then I can help clear up some of the confusion for you and help you make a confident choice. If you are not new to this subject, then this will be a great refresher for you.
Here we go…
Sole Proprietorship is the most common form of business entity. Great for most start-ups. It is the simplest form of business organization. Essentially, you and your business are one. You would file the same tax return that you do for your personal taxes and include the earnings and allowable deductions of your business. You should keep your business revenues and expenses separate from your personal finances for accounting purposes. A sole proprietorship is appropriate when there is one owner. Advantages are no setup requirement or costs and transfer of ownership is easy. However, you are personally liable for any debts the business incurs.
Partnerships are like a sole proprietorship for more than one person. There are two types of partnerships, general and limited. In a general partnership, all partners are equally liable for the debts of the partnership. In a limited partnership, limited partners are protected from liability. Partnerships are easy to setup and low cost and may offer the added advantage of a broader management base.
Corporations are legal entities, operating under state law and require that you obtain a Federal ID number from the government. You must file Articles of Incorporation and issue stock. Corporations require more time and money on the front end. There are two types of Corporations, C Corporations and S Corporations. The main difference is in liability and taxation.
C Corporations are an entirely separate entity from the stockholders and stockholders are not responsible for debts and liabilities taken on by the corporation. However, C Corporations are subject to double taxation. Said another way, you as a stockholder pay personal income tax on your salary or earning paid to you by the corporation and the corporation pays Corporate income tax on it’s earnings. That’s double taxation.
S Corporations do away with the double taxation by offering the ability of the corporate earnings to pass through and be paid by the individual stockholders. The earnings of the corporation are reported on your personal tax return. An S Corporation is also limited to 100 stockholders whereas a C Corporation can have unlimited stockholders – think Microsoft or Apple or McDonalds. Otherwise, an S Corp is basically the same as a C Corp.
Limited Liability Corporation or LLC is a hybrid of the Corporate structure. An LLC has members vs. stockholders, requires that you file with the government, but limits the liability of the members. So, like a corporation but with less liability.
You can find information on what tax forms each business entity is required to file at
https://www.irs.gov/businesses/small-businesses-self-employed/business-structures
A helpful side by side chart on business entities can be found at:
https://www.incorporate.com/business_structure_comparison_chart.html#
In Summary, how you structure your business has a lot to do with how you will operate and what amount of liability and costs you want to incur.
Most businesses start out as Proprietorships or Partnerships and as they grow become LLC’s or corporations. Check with your accountant as to what entity is best for you or do the research yourself. You can also use websites such as legalzoom.com to help you through the process.
Now, get back to being excited about your new biz.
Happy Dreaming!
Tammy
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