Let me start by stating that the business entity that you choose can make or break your business. NO exaggeration. Each entity has its pros and cons. Some require more paperwork than others. Some protect you from liability whereas others have zero protection.
This is what results when one person starts a business and files NO paperwork. There are no fees, making it relatively easy to start. A single individual owns the entire business and all of its assets and the U.S. government makes no distinction between the business and its owner. What this means is that during tax time you claim all profits and losses on your personal income tax return. It also means that you are liable for all claims or debts against your business.
You can operate your sole proprietorship under your legal name or under a fictitious name. If you do go with a fictitious name, you will need to file a DBA or “doing business as” certificate in the office of the county in which you operate your business.
General Partnerships are similar to Sole Proprietorships except that General Partnerships include two or more individuals. If partners agree to form a business together then you have a general partnership (Yes, that simple). As with a sole proprietorship, you need to register your DBA with your county clerk just like the sole proprietorship. Make sure to also formalize your partnership with a partnership agreement to outline how the business will be run.
Also like sole proprietorships, general partnerships leave you open to personal liability. Every partner is FULLY liable for claims against the business and the other partners. Partners are also liable for all debts. General partnerships are similar to sole proprietorships for tax purposes. They are “pass-through” entities, meaning that the partnership’s income and expenses are reported on each partner’s personal income tax return.
LIMITED LIABILITY COMPANY (LLC)
LLCs are my favorite business entity for many reasons. An LLC is a lot easier to form than a corporation and they don’t require as much paperwork. LLCs offer the taxation benefits of a partnership and are easier to manage than a corporation.Members of an LLC are shielded from personal liability for the business’ debts and obligations. Exceptions to this rule exist in cases of misconduct.
The corporation is the most expensive and difficult business structure to form. I recommend hiring an attorney to help you customize corporate documents for your business needs. In most states, you must file Articles of Incorporation, create bylaws and organizational resolutions that specify the operating rules for the corporation, appoint a board of directors and issue stock certificates to your initial shareholders. This last step can be complicated because stock certificates must comply with federal securities laws. Almost all states allow one-person corporations, where the business owner serves as officer, director, and shareholder.
Of all the different business types, corporations are the hardest to maintain. Corporations must hold annual board meetings and shareholder meetings. Most decisions in running the corporation must be made by a formal vote and (in most states) documented in meeting minutes. The biggest advantage of forming a corporation is that you cannot be held personally liable for the corporation’s debts or legal obligations, except in case of misconduct. At tax time, corporations are generally subjected to “double taxation” (C Corporation) unless S Corporation Status has been filed for with the IRS.
A corporation created for some type of public benefit is called a nonprofit corporation. Formation of a nonprofit in your state does not automatically give it tax-exempt status, but you can certainly apply for such status under IRS Code, section 501(c)(3). Contact me if you need help applying for your 501(c)3.
Unless the goal of your business is not to make money then this is probably not the structure that you’re looking for.
For more information on the different business structures and how you can apply for them, set up a consultation with me TODAY!