What Is The Right Kind Of Business For You To Start?
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Sole Proprietorship
This is a business entity where the owner takes on full responsibility with debt, legal actions, and income tax. There is no corporate tax, but also the lack of limited liability that other entities enjoy. They usually are able to create a trade name so they can operate as a business name instead of themselves.
Upside- This is a great way to avoid the formalities of business meetings to decide on legal issues for the business. Tend to be easier tax returns and no formal way of canceling the business. All profits go straight to the owner and there are very little government regulations. You don’t have to worry about quaterly and annual payroll reports.
Downside- Good luck being to be considered legitimate in the business world. It will be hard to get capital from any investors. It is hard to get any employees because the business is not stable. The owner is responsible for health insurance and as soon as the owner decides to get rid of the business or dies then it is gone and so are the jobs. This is no stability. If you start going somewhere with this sole propiertorship then you are going to have to move up to an LLC
LLC
A Limited Liability Corporation is as it says it is. Limited Liability for the owners and they are more felexible to the owners and tend to be created for smaller businesses. They have the same issue as being disregared when created by a single individual just like a sole propiertorship. When it comes to taxes for the federal government many LLC’s will register as a C Corporation or a S Corporation.
LLCs are organized with a document called the “articles of organization” approved by the state. It is common to for an LLC to have an operating agreement privately specified by the members. The operating agreement is a contract among the members of a LLC governing the management, membership, operation, purpose and distribution of income of the company. Either you can organize as member management or manage management. Manage management is two-tierd and recommended if you decide to go corporate.
Upside- No annual shareholders meeting, no loss of power to board of directors, not as much paperwork or recordkeeping. No double taxation unless you decide to be taxed as a corporation. Members, which are the owners, are not targeted in case of lawsuits, actions, and debts, while that goes to the business itself. It allows you to be taxed as a s-corp, individual, sole propietorship, or an LLC. Profits and responsibilities can be delegated without people having to be awarded membership.
Downside- Harder to find investors that are probably looking toward a corporation that will allow for eventual IPOs. Franchise taxes are necessary in several states. You tend to run into problems without the influence of a board of directors. Most LLC’s are looked down on as novices. There are blurry ideas as far as possible positions for an LLC and who is able to make contracts, decisions and representations.
S-Corp
This is basically a corporation, but I am bringing this type up because this is the most commonly used and discussed as far as I know. Part of the reason why this is the case is that a S-Corp can be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
This is important because the corporation pays no income tax on the profits. Instead that is the responsibility of the shareholders. Whereas a c-corp pays both.
To be eligible the company must exist as a domestic corporation or a LLC of some kind. There are other requirements like having to be American citizens, but these requirements aren’t tso difficult. When these are met you can fill out the 2553 tax form to create an “Election by a small business corporation”. This must be done within 75 days after the beginning of the tax year for which the election is to take effect. If any laws are broken then the s-corp will return back to a c-corp.
Pros- C-corps get taxed on profits at corporate rates and then shareholders at personal rates, while a S-corp is taxed at personal rates to the shareholders. This can mean more money kept by the owners. They provide protection against individual shareholders legally. An s-corp makes it easier for you to establish IPO for your company. It is easier to conduct business, impress other companies, and can be created in 24 hours.
Cons- Required to perform board of director meetings and annual reports like a C corp. There are going to be more taxes so get a CPA to take care of the additional books you will have. Unfortunately, they can’t deduct benefits, such as health insurance for any shareholder earning more than 2%. They can’t own subsidiaries and can’t retain earnings no matter how distributed.
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16 Responses to “What Is The Right Kind Of Business For You To Start?”
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I’ve been struggling over which version of a corporation to start, so thanks for the info
Great explanation of the pros and cons of each business type. Is a DBA the same as a sole proprietorship?
I am stuck on exactly this question. I have gone a little further as I intend to run a LTD and then putting the money through an offshore company as my country likes to deduct close 50% of my net profit. Do you have any solid info related to such a setup ? Would be most thankful if you did a post on this
Great info, thanks.
thank you calmyl to like
thx for the overview. For us europeans, the british ltd., similar to the llc is a new opportunity for small business owners. Although it should be mainly used for b2c businesses because too many b2b businesses incorporated as a ltd have gone awry :-/
This is very helpful for those planning a startup business. I made reference to it on my own site.
Thanks for the concise and simple explanation.
I went the llc route, and the best advice I can give is to use a lawyer! The corporation paperwork was really confusing for me, but a lawyer was willing to do it all for me for a small flat fee. It was money well spent, so I could focus on building the business itself.
i think its wise to start online biz now. try my finance blog www.finance-and-life.blogspot.com
With all the home business deductions and tax write offs, EVERYONE needs a home based business.
This takes me back to my college course where we learned all of this. It is very interesting to me, but not enough to have me pursue it. I think I will just sit on the investment side.
Cheers.
HI,
A lot depends on which state you are in, also. We have been both routes and, personally, I like the sole proprietorship the best, if you will work the business yourself. There are just a lot less headaches, regulations, government interference, etc. When you start hiring employees it becomes a whole new ballgame.
This thing is not same for everyone.It may varies.
even if you choose a simplier route you would still need to change it later on everything if you choose to inc. or llc.
what a big thing
Thanks for the great information. I, too, have been struggling with this and it seems just when I’ve finally decided to do it one way, something comes up to put that doubt back in my mind. Like the others have said, it also depends on which state you are in and what your circumstances are.