Starting a Business

As an entrepreneur, you’ve got the idea, the plan, and the wherewithal to follow through—now to file the paperwork.  However, what seems like such a simple step in the start-up process can have a big impact on your business down the road.  It can also be a difficult decision if business law and/or tax preparation aren’t your areas of expertise.  So, here are a few things you need to know.

A sole proprietorship is typically the first stepping stone for many businesses for one primary reason:  it’s the easiest to establish.  Unlike many other types of organization, a sole proprietor doesn’t have to formally register within any state or with the IRS.  It also evades many of the regulations regarding formal meetings or minutes, primarily because there’s only one person in control.  This owner makes all of the decisions, all of the profits, and, conversely, takes all of the losses.  Unfortunately, that means this is only an option for those startups that have just one person behind the scenes.  If you’re working within a partnership, or a group entity, there’s no way to split ownership within a sole proprietorship (hence the inclusion of the word “sole”).  Even for an individual entrepreneur, this type of business model can get complicated.  Since you are acting as both the individual and the business—often even utilizing your social security number as your EIN (employer identification number) —the finances, taxes, and liability of both parts of your life can become hopelessly entangled.  Since there’s no legal separation between home and work, your personal property can be affected by any legal issues incurred by your company, including bankruptcy.  Taxes can also be a heavy burden as a sole proprietor, since the full profit of your company is subject to both income tax, as well as the dreaded self-employment tax.  Still, it requires the least amount of paperwork, as explained in full here:  https://www.thebalance.com/sole-proprietorship-398896.  Depending on where your business is, in terms of development, this could be the best option for you at present.

After this step, the next choice becomes a little more difficult.  You can either choose the path of an LLC, or go for incorporation, but first you need to understand the difference between the two.  Both act as a separation between your personal and professional assets, but come with their own unique advantages and disadvantages.  A limited liability company (LLC) allows for multiple owners, referred to as members, and places no restriction on how many members one LLC can have.  With that being said, however, it’s not always easy to remove a member should they choose to leave the company unless the organizational documents are structured correctly from the start.  The LLC also offers some tax advantages by allowing profits to pass directly to the owners without incurring corporate taxes.  Unfortunately, you’re still required to pay the self-employment tax on these profits, but they’re usually lower than those within a sole proprietorship.  This is a common solution for many true partnerships, though it’s not an option for every type of business (i.e. banks and insurance companies).  Find out more about who can and can’t participate in an LLC on the IRS’s web site:  https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc.  Additionally, the paperwork for this type of business structure is subject to more regulations, many of which vary from state to state, so you may want to consult a professional before proceeding with this election.

As for corporations, many assume it’s a matter of adding “Inc.” on to your company name, when in reality, that one abbreviation can mean a number of different things.  In a veritable alphabet soup of options, you have the C corp, S corp, B corp, Close corp, and, of course, a nonprofit corporation.  Depending on your overall mission and size, some of these can be immediately discarded.  A benefit corporation, or B corp, has an expectation of contributing to the public/shareholders with their overall mission in order to maintain this status, yet it’s not available in all states.  This expectation applies to Close corps, as well, but with less formality, and most people are familiar with nonprofits.  For greater detail on the many nuances of corporate structure, check out this cheat sheet from the U.S. Small Business Administration:  https://www.sba.gov/business-guide/launch/choose-business-structure-types-chart.  As to tax differences, in the case of a C corporation, this means double taxation, since owners are required to pay taxes on both the overall profits of the business, as well as the dividends paid to shareholders.  The S corporation removes that element from its organization, but has greater limitations on the number and citizenship of owners that can exclude a number of companies.

If you’ve gotten to the end of this, and still have no idea which model most suits your business, it’s best to turn to a professional.  The Law Offices of Kirk Halpin & Associates, P.A. consult on this issue on a regular basis with its clients and have experience working with a wide variety of industries.  Moreover, we can provide continued legal assistance as your business grows and changes, so you can focus on what you do best.

This entry was posted on Friday, September 15th, 2017 at 7:48 am. Both comments and pings are currently closed.

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