4 Reasons to Incorporate (or Form an LLC)
When you start a business, it's tempting to get caught up in listening to attorneys and advisors tell you "You MUST incorporate." Incorporating a business may be a good move for your new business, or it may be something you can wait and do later. Understanding the reasons for incorporating a business can help you make a decision.
1. To get financing. Some lenders prefer that you have a specific legal business structure, rather than just a sole proprietorship. Particularly for liability purposes (see reason #2), the bank wants to know that your business is protected so you can pay back your loan.
2. To limit potential liability. Liability is variable, depending on the type of products or services you provide and the number and type of employees. If you are working at home writing software or a blog, your liability is probably limited. On the other hand, if you have products that could harm people or if you have employees, you might want more protection than just liability insurance. Your liability may change as your business grows and as you add employees.
3. For tax reasons. This one is tricky. Corporations are separate tax entities, and the taxes on a corporation may or may not be greater than taxes for a company that is taxed at the owner's personal rate. Spend some time with your tax advisor to make sure you understand the tax implications of incorporation.
4. To manage income as your business grows. When you start out, you may not be making money right away, and you may decide it's not worth it to incorporate. But as you go along, you may find that you want to separate your business income from personal income and take a salary. Having a corporation allows you to do this; it's one case where a corporation is preferable to an LLC (an LLC is taxed at the personal tax rates of the owners). Timing is important, so if you think you might be making a lot of money in a particular year, you may want to switch to a corporation or S corporation.
The bottom line: Don't incorporate just because your attorney says it's a good idea. Attorneys make money helping you incorporate, and they make no money if you stay a sole proprietor or create a do-it-yourself LLC.
Selecting your business structure is a decision is not a once-and-done situation. Revisit the question often, as your business grows and changes. Review all the alternatives and consider what's best for your business at this time and into the future. Remember, it's always possible, and easy, to change from a sole proprietorship to an LLC or a corporation. It is almost impossible to un-incorporate your business and go back to being a sole proprietor.
Free Online Course in Types of Business
Want to start a business but you're not sure what type of business to select? Want to maximize your profit and pay lower business taxes by selecting the right business type? Want to change your business type to avoid legal liability? Sign up for my seven-day free Guide to Types of Business course.
Purpose of This Course
Many people will try to give you advice on selecting a business type. Some will say, "this is the best type because it works for me." Attorneys may try to steer you to incorporating because it's the only business type they know. Others will tell you an LLC is the "best" type. Before you make decision that will cost you lots of money, learn about the types of business by taking this course. The course is seven days - an email lesson a day for seven days. By the end of the course, you will have a good basic understanding of business types and you will be on your way to selecting the type of business that best fits your needs.
Do You Have Questions about this Course?
If you have questions about any of the lessons in this course, or you want to clarify something or ask about a specific situation, you can:
Ask the question in the Forum
or
Email the instructor directly: biztaxlaw@aboutguide.com
A disclaimer: The information in this course is general in nature and it is not intended to be tax or legal advice. Laws change, and every business is different, so be sure to get tax or financial advice before you make important decisions.
Lesson One - An Introduction to Business Types
The two basic business types - separated from owner and not separated from owner (by William Perez, About.com Guide to Taxes
A Checklist of Factors to Consider in Selecting a Business Type
Business and Legal Factors in Selecting a Business Type, from William Perez, About.com Guide to Taxes
Business Types and Employment Taxes
All About the Sole Proprietor Business
Lesson Two: Partnerships and Limited Liability Companies (LLCs)
What is a Partnership
How to Start a Partnership
Types of Partnerships
The Partnership Agreement
What is a Limited Liability Company (LLC)?
How to Form an LLC
All About the Single-Member LLC
Lesson Three - Corporations and S Corporations
Types of Corporations
How to Incorporate a Business, including the incorporation process in each U.S. state
Corporations, Liability, and the Corporate Shield
How to Become an S Corporation
More about S Corporations
Corporations vs. S Corporations - A Comparison
Corporations vs. LLCs, a Comparison
S Corporations vs. LLCs - A Comparison
Lesson Four - Income Taxes for Business Types
How a Sole Proprietor Pays Income Taxes
How a Partnership Pays Income Taxes
How an LLC Pays Income Tax
How a Corporation Pays Income Tax
How an S Corporation Pays Income Tax
Business Types and Profitable vs. Unprofitable Businesses, by William Perez, Guide to Taxes
Lesson Five - Selecting a Business Type
Advantages/Disadvantages of Sole Proprietorship
Tax Advantages and Disadvantages of an LLC
Comparisons of Business Types
Business Type Comparison Listing/Factors
Liability Comparison - LLC vs. S Corporation
Lesson Six: Special Circumstances
S Corporations vs. LLCs
LLC Taxed as Corporation
The Qualified Joint Venture
The Disregarded Entity
Lesson Seven: Resources and a Course Outline
Resources from the US Business Law & Taxes website
More about Business Structures on the IRS Website
Find information on your state's Secretary of State website
The Small Business Administration on Business Types
Purpose of This Course
Many people will try to give you advice on selecting a business type. Some will say, "this is the best type because it works for me." Attorneys may try to steer you to incorporating because it's the only business type they know. Others will tell you an LLC is the "best" type. Before you make decision that will cost you lots of money, learn about the types of business by taking this course. The course is seven days - an email lesson a day for seven days. By the end of the course, you will have a good basic understanding of business types and you will be on your way to selecting the type of business that best fits your needs.
Do You Have Questions about this Course?
If you have questions about any of the lessons in this course, or you want to clarify something or ask about a specific situation, you can:
Ask the question in the Forum
or
Email the instructor directly: biztaxlaw@aboutguide.com
A disclaimer: The information in this course is general in nature and it is not intended to be tax or legal advice. Laws change, and every business is different, so be sure to get tax or financial advice before you make important decisions.
Lesson One - An Introduction to Business Types
The two basic business types - separated from owner and not separated from owner (by William Perez, About.com Guide to Taxes
A Checklist of Factors to Consider in Selecting a Business Type
Business and Legal Factors in Selecting a Business Type, from William Perez, About.com Guide to Taxes
Business Types and Employment Taxes
All About the Sole Proprietor Business
Lesson Two: Partnerships and Limited Liability Companies (LLCs)
What is a Partnership
How to Start a Partnership
Types of Partnerships
The Partnership Agreement
What is a Limited Liability Company (LLC)?
How to Form an LLC
All About the Single-Member LLC
Lesson Three - Corporations and S Corporations
Types of Corporations
How to Incorporate a Business, including the incorporation process in each U.S. state
Corporations, Liability, and the Corporate Shield
How to Become an S Corporation
More about S Corporations
Corporations vs. S Corporations - A Comparison
Corporations vs. LLCs, a Comparison
S Corporations vs. LLCs - A Comparison
Lesson Four - Income Taxes for Business Types
How a Sole Proprietor Pays Income Taxes
How a Partnership Pays Income Taxes
How an LLC Pays Income Tax
How a Corporation Pays Income Tax
How an S Corporation Pays Income Tax
Business Types and Profitable vs. Unprofitable Businesses, by William Perez, Guide to Taxes
Lesson Five - Selecting a Business Type
Advantages/Disadvantages of Sole Proprietorship
Tax Advantages and Disadvantages of an LLC
Comparisons of Business Types
Business Type Comparison Listing/Factors
Liability Comparison - LLC vs. S Corporation
Lesson Six: Special Circumstances
S Corporations vs. LLCs
LLC Taxed as Corporation
The Qualified Joint Venture
The Disregarded Entity
Lesson Seven: Resources and a Course Outline
Resources from the US Business Law & Taxes website
More about Business Structures on the IRS Website
Find information on your state's Secretary of State website
The Small Business Administration on Business Types
Selecting, Registering, and Trademarking Your Business Name
Selecting a business name is an important element of your business start-up. Your name can mean everything - like Amazon - and it can enhance the success of your business. The process of selecting a business name involves legal elements, including registering your name and possibly trademarking your name if it is unique. Here are the steps in the process:
1. Select Your Business Name
The name you create for your new business is important. Once you select a business name you can only change it with a great deal of difficulty. For example, if you create business cards and a web site and you use the business name in legal documents, you won't be able to change it without changing many legal documents. Think about these factors as you consider a business name.
1. Select Your Business Name
The name you create for your new business is important. Once you select a business name you can only change it with a great deal of difficulty. For example, if you create business cards and a web site and you use the business name in legal documents, you won't be able to change it without changing many legal documents. Think about these factors as you consider a business name.
2. Research Your Business Name
After you have selected a business name, do some research to make sure no one else has your name. You can never be certain you aren't copying the name of another business, but doing the research will minimize the chance that you will have to change the name because it conflicts with the name of another business.
3. File a Fictitious Name (D/B/A) Notice for Your Business
When a company is legally registered with one name and that company is advertising or trading or is commonly known by another name, the common name is a “fictitious name.” Learn about when to register a fictitious name and when you don't need to.
4. Register Your Business Name
What is the difference between a "fictitious name" and a business name registration? A fictitious name is used when the legal name of your business (the name on incorporating documents or the name of your limited liability company) is different from the name you use for trade. Depending upon the type of business entity you set up, you may need to register your business name with your state and with localities. Learn more about the business name registration process.
5. Trademark Your Business Name
If you have a unique business name that you want to protect, you might want to consider trademarking the name. The trademark process is explained in this article.
6. Change Your Business Name
Think carefully before you change your business name. Changing your business name means changing almost everything, from business cards to products to your web site and more. If you feel you must change your name, the process you use will depend on your business type. Read this article for the details.
Selecting a Business Organization Type - a Checklist
Which Business Organization Type Should I Select?
Here are some questions to ask yourself as you consider what business legal form to use:
How much time and money does it take to set up? The costs range from minimal, for a sole proprietorship, to expensive, for a corporation. Here is a list, in order of cost from lowest to highest:
Sole Proprietorship
To start a sole proprietorship, all you need is a business license for your city, possibly a “fictitious name” statement, and a business checking account.
Partnership
To start a partnership, you will need an attorney to help you with the partnership agreement.
Limited Liability Company (LLC)
To start a Limited Liability Company, you will need to apply to your state Secretary of State to become an LLC, by filing Articles of Organization. You may be able to do this filing yourself, or you can get an attorney to help.
Corporation
To start a corporation, you will need to pay an attorney to help you set up your corporation correctly, in the state where you will be operating, including a corporate charter and by-laws.
What happens to the business if I am no longer there? If you want the business to continue, form a corporation, or put provisions in your partnership agreement or LLC operating agreement to allow the business to continue without you. If you choose a sole proprietorship, the business ends if you leave or die or can no longer run the business.
How much control do I have? Select a sole proprietorship or single-member LLC if you want complete control. In a partnership or multi-member LLC, you will have to share control with your partners or the other Members. In a corporation, you will have a Board of Directors helping you make decisions, so if total control over the business is important to you, don’t incorporate.
Who receives the profits and the losses? If you want all the profits, you must assume all the losses. Set up as a sole proprietorship or an LLC to keep all the profits (after taxes, of course!). If you set up as a corporation, you will have to give some money to the other shareholders in the form of dividends.
Who pays the taxes? In a corporation, the business pays the income taxes, at the corporate tax rate. In most other forms, you can decide to pay taxes through your personal tax return, depending on your personal tax rate.
What is my liability? As a sole proprietor, you will have all of the business liability for bad debts of the business, as well as for other liabilities, such as for negligence, product liability, or professional liability. You can limit your liability by setting up an LLC or, even better, by forming a corporation. Because the corporation is a separate entity, you may be shielded personally from the liability of the corporation. This is a tricky area, so make sure you understand your personal liability in each of these forms of business. Find out more from your attorney before you make a decision.
In the end, whatever factor is most important to you will determine the form of business ownership you choose. Talk to your CPA and your attorney for more advice and information.
Still confused about business legal types? Sign up for my free online course Guide to Types of Business. You will receive seven email lessons in seven days.
Here are some questions to ask yourself as you consider what business legal form to use:
How much time and money does it take to set up? The costs range from minimal, for a sole proprietorship, to expensive, for a corporation. Here is a list, in order of cost from lowest to highest:
Sole Proprietorship
To start a sole proprietorship, all you need is a business license for your city, possibly a “fictitious name” statement, and a business checking account.
Partnership
To start a partnership, you will need an attorney to help you with the partnership agreement.
Limited Liability Company (LLC)
To start a Limited Liability Company, you will need to apply to your state Secretary of State to become an LLC, by filing Articles of Organization. You may be able to do this filing yourself, or you can get an attorney to help.
Corporation
To start a corporation, you will need to pay an attorney to help you set up your corporation correctly, in the state where you will be operating, including a corporate charter and by-laws.
What happens to the business if I am no longer there? If you want the business to continue, form a corporation, or put provisions in your partnership agreement or LLC operating agreement to allow the business to continue without you. If you choose a sole proprietorship, the business ends if you leave or die or can no longer run the business.
How much control do I have? Select a sole proprietorship or single-member LLC if you want complete control. In a partnership or multi-member LLC, you will have to share control with your partners or the other Members. In a corporation, you will have a Board of Directors helping you make decisions, so if total control over the business is important to you, don’t incorporate.
Who receives the profits and the losses? If you want all the profits, you must assume all the losses. Set up as a sole proprietorship or an LLC to keep all the profits (after taxes, of course!). If you set up as a corporation, you will have to give some money to the other shareholders in the form of dividends.
Who pays the taxes? In a corporation, the business pays the income taxes, at the corporate tax rate. In most other forms, you can decide to pay taxes through your personal tax return, depending on your personal tax rate.
What is my liability? As a sole proprietor, you will have all of the business liability for bad debts of the business, as well as for other liabilities, such as for negligence, product liability, or professional liability. You can limit your liability by setting up an LLC or, even better, by forming a corporation. Because the corporation is a separate entity, you may be shielded personally from the liability of the corporation. This is a tricky area, so make sure you understand your personal liability in each of these forms of business. Find out more from your attorney before you make a decision.
In the end, whatever factor is most important to you will determine the form of business ownership you choose. Talk to your CPA and your attorney for more advice and information.
Still confused about business legal types? Sign up for my free online course Guide to Types of Business. You will receive seven email lessons in seven days.
Register Your Business With Federal, State, and Local Entities
When you are starting a business, you need to make sure your business is registered with the proper federal, state, and local agencies. Find out where and how to register, including:
Federal employment identification, payroll tax registration, registration for online payments
State business entity registration and sales tax permits
City and county business licenses, zoning permits
1. Register with the IRS - Receive an Employer ID Number
Almost every business needs to register with the IRS and have an employer ID number (EIN). Even if you are a sole proprietor with no employees, your bank will most likely require you to have an EIN. You can apply online or by phone and receive your EIN immediately
2. Federal Tax Payments using EFTPS
The IRS has made it easy for businesses to file and pay federal taxes - income taxes and payroll taxes - online, using the Electronic Filing and Tax Payment System. You can sign up and receive a password within a few weeks, and you're on your way to easy payments.
3. State Filing for Business Entity
To file your business type with your state, you will need to go to your state's Secretary of State website and look for the business division. If you are starting a sole proprietorship, you don't need to register as a business entity with your state, but all other types of businesses (LLCs, partnerships, and corporations) must register.
If you do business in more than one state, you will need to register in each state.
4. Register to Collect and Pay State Sales Tax
If you are selling products or services that are subject to sales tax, you must apply for a tax permit with your state, from your state's department of revenue. Most states have put this process online so it is relatively easy to do.
5. Registering in More than One State
State registration is necessary if you are "doing business" in a state. The definition of "doing business" is different for income tax and for sales taxes; this article describes the requirements for each.
If you need to register in another state for income tax purposes, you will need to register as a "foreign" entity (a foreign LLC, for example). See item #3 to learn how to register for income taxes in a state.
If you need to register in another state for sales tax purposes, see item #4.
6. File a D/B/A or "Fictitious Name" Registration with Your County
If your business is operating under a different name from the official name of your business, you must file a D/B/A (Fictitious Name or Trade Name) registration with your county. For example, if your business is Extreme Enterprises LLC and you have stores called Credit Mart, you must let the public know who owns those stores.
7. Comply with Local Ordinances and Apply for Local Permits
Although every locality has slightly different regulations, almost all have the same types of rules you must follow. For example:
If you are building a new building, you will have to apply for building permits
You need to be aware of zoning and you may need to apply for a zoning variance
If your busines is involved in handling food, you will need to get a health permit
It's a good idea to have a fire inspection before you move into your new location
Local Licenses and Permits
Another important task in starting a business is making sure you have all the licenses and permits required by your locality. Each location has different requirements, but there are some general licenses and permits that almost every location requires. Review this list to be sure you don't miss something.
1. What is the Difference Between a License and a Permit?
A license and a permit both have similar intents - to give permission to a person or business to do something. A license can be given by a government entity, a business, or an individual, but a permit is usually given by a local government entity.
2. What Business Licenses or Permits Do I Need?
Most localities have similar requirements for licenses and permits for all businesses that serve the public. Unless you are operating alone in your home, you will need to review this list, which provides information on how to obtain these licenses and permits.
3. Do I Need a Zoning Permit or Variance for My Business Location?
The need for a zoning permit or variance (exception) to zoning depends on the type of business you are planning to operate and the zoning of the surrounding area. This article lists reasons a zoning permit might be necessary.
4. Does My Business Need a Health Permit?
If your business involves handling food or food products for sale to the public or in a restaurant, you will probably need a health permit.
5. How Do I Get a Building Permit for Construction?
A building permit is necessary if you are constructing a new building or making substantial changes to an existing building, for your business. Although your contractor may acquire the permit for you, you should understand how the building permit process works.
6. What Special Licenses or Permits Does My Business Need?
Depending on your business type or the types of products or activities your business engages in, you may need one or more special license or permits. These permits come in three types:
Licenses or permits based on type of business, like a bar or pool hall or movie theater or a mobile food vendor
Licenses or permits for selling certain types of products, like alcohol or cigarettes
Licenses or permits for certain activities, like use of animals, or special events.
1. What is the Difference Between a License and a Permit?
A license and a permit both have similar intents - to give permission to a person or business to do something. A license can be given by a government entity, a business, or an individual, but a permit is usually given by a local government entity.
2. What Business Licenses or Permits Do I Need?
Most localities have similar requirements for licenses and permits for all businesses that serve the public. Unless you are operating alone in your home, you will need to review this list, which provides information on how to obtain these licenses and permits.
3. Do I Need a Zoning Permit or Variance for My Business Location?
The need for a zoning permit or variance (exception) to zoning depends on the type of business you are planning to operate and the zoning of the surrounding area. This article lists reasons a zoning permit might be necessary.
4. Does My Business Need a Health Permit?
If your business involves handling food or food products for sale to the public or in a restaurant, you will probably need a health permit.
5. How Do I Get a Building Permit for Construction?
A building permit is necessary if you are constructing a new building or making substantial changes to an existing building, for your business. Although your contractor may acquire the permit for you, you should understand how the building permit process works.
6. What Special Licenses or Permits Does My Business Need?
Depending on your business type or the types of products or activities your business engages in, you may need one or more special license or permits. These permits come in three types:
Licenses or permits based on type of business, like a bar or pool hall or movie theater or a mobile food vendor
Licenses or permits for selling certain types of products, like alcohol or cigarettes
Licenses or permits for certain activities, like use of animals, or special events.
First Steps to Starting a Business
New business owners are often overwhelmed with the tasks and steps for business start-up. But you can start a business with these simple steps.
1. Select, Register, and Trademark Your Business Name
Most business owners start out with a business name, but before you solidify that name by putting it in a logo, on business cards, and on your website, make sure it will be a good name for many years. Selecting a name, registering that name, and possibly trademarking the name mean that you have made a commitment to that name. Read this section before you select that business name.
2. Find a Business Location
Unless you are working out of your home, you will need a location for your business. It might be an office or a retail space or a warehouse. Here are the steps to take to find that location, negotiate the lease, and get favorable terms.
3. Select Your Business Legal Type
Here is a checklist to help you make the decision of what type of business legal entity you will start. The types of entities range from the simplest sole proprietorship, through partnerships and limited liability companies, to the complicated corporation and s-corporation forms.
4. Apply for Your Tax ID Number (Employer ID)
One of the first steps in business start-up, after you have a name and a business address and you know your legal form, is to fill out a tax identification application (sometimes called an employer ID. This number acts as your unique business identifier on all types of registrations and documents, and most banks want you to have this number before you can set up a business checking account and apply for a loan.
5. Apply to Your State for a Sales Tax Permit (for Taxable Items, Services)
If you are selling any products or services that are subject to sales tax in your state, you must collect tax from customers and pay the state back that tax. Here's what you need to know about state sales tax.
6. Get a Business Checking Account
After you have applied for your tax ID number, you can use that number to set up a business checking account. Here are some factors to consider when setting up that account.
7. Obtain Local Licenses and Permits
Learn about what local licenses and permits you might need to apply for during the start-up of your business.
8. Create a Marketing Plan for Your Business
Before you can start selling your products or services, you will need to put together a plan detailing exactly what you are selling, who you are selling to, defining your competition, and defining exactly how you will advertise and promote your products/services during your first year of business and beyond. Having a marketing plan in place will help a potential lender see that you are serious about selling and it will give you a plan of attack to work from as you get started.
1. Select, Register, and Trademark Your Business Name
Most business owners start out with a business name, but before you solidify that name by putting it in a logo, on business cards, and on your website, make sure it will be a good name for many years. Selecting a name, registering that name, and possibly trademarking the name mean that you have made a commitment to that name. Read this section before you select that business name.
2. Find a Business Location
Unless you are working out of your home, you will need a location for your business. It might be an office or a retail space or a warehouse. Here are the steps to take to find that location, negotiate the lease, and get favorable terms.
3. Select Your Business Legal Type
Here is a checklist to help you make the decision of what type of business legal entity you will start. The types of entities range from the simplest sole proprietorship, through partnerships and limited liability companies, to the complicated corporation and s-corporation forms.
4. Apply for Your Tax ID Number (Employer ID)
One of the first steps in business start-up, after you have a name and a business address and you know your legal form, is to fill out a tax identification application (sometimes called an employer ID. This number acts as your unique business identifier on all types of registrations and documents, and most banks want you to have this number before you can set up a business checking account and apply for a loan.
5. Apply to Your State for a Sales Tax Permit (for Taxable Items, Services)
If you are selling any products or services that are subject to sales tax in your state, you must collect tax from customers and pay the state back that tax. Here's what you need to know about state sales tax.
6. Get a Business Checking Account
After you have applied for your tax ID number, you can use that number to set up a business checking account. Here are some factors to consider when setting up that account.
7. Obtain Local Licenses and Permits
Learn about what local licenses and permits you might need to apply for during the start-up of your business.
8. Create a Marketing Plan for Your Business
Before you can start selling your products or services, you will need to put together a plan detailing exactly what you are selling, who you are selling to, defining your competition, and defining exactly how you will advertise and promote your products/services during your first year of business and beyond. Having a marketing plan in place will help a potential lender see that you are serious about selling and it will give you a plan of attack to work from as you get started.
Start Your Business
Learn how to start your own business from idea to opening day. If you have a great idea for a product or service you want to offer, you will need to go through this process step by step. You will begin by choosing a name and location, and selecting a form of organization. Then you will estimate your startup costs and operating income and expenses. Finally, you will put everything together into a business plan and to actually start your business.
First Steps to Business Startup
The first steps to business startup involve obtaining licenses and fees, setting up a business bank account, obtaining a business phone number, and in general establishing your business presence, either online or in your community.
First Steps to Business Startup
Apply for an Employer ID Number
File a Fictitious Name (DBA) Statement
Select Your Tax Year and Accounting Method
Get Local Licenses and Permits
Register with Federal, State, Local Agencies
First Steps to Business Startup
The first steps to business startup involve obtaining licenses and fees, setting up a business bank account, obtaining a business phone number, and in general establishing your business presence, either online or in your community.
First Steps to Business Startup
Apply for an Employer ID Number
File a Fictitious Name (DBA) Statement
Select Your Tax Year and Accounting Method
Get Local Licenses and Permits
Register with Federal, State, Local Agencies
Selecting a Business Organization Type - a Checklist
Which Business Organization Type Should I Select?
Here are some questions to ask yourself as you consider what business legal form to use:
How much time and money does it take to set up? The costs range from minimal, for a sole proprietorship, to expensive, for a corporation. Here is a list, in order of cost from lowest to highest:
Sole Proprietorship
To start a sole proprietorship, all you need is a business license for your city, possibly a “fictitious name” statement, and a business checking account.
Partnership
To start a partnership, you will need an attorney to help you with the partnership agreement.
Limited Liability Company (LLC)
To start a Limited Liability Company, you will need to apply to your state Secretary of State to become an LLC, by filing Articles of Organization. You may be able to do this filing yourself, or you can get an attorney to help.
Corporation
To start a corporation, you will need to pay an attorney to help you set up your corporation correctly, in the state where you will be operating, including a corporate charter and by-laws.
What happens to the business if I am no longer there? If you want the business to continue, form a corporation, or put provisions in your partnership agreement or LLC operating agreement to allow the business to continue without you. If you choose a sole proprietorship, the business ends if you leave or die or can no longer run the business.
How much control do I have? Select a sole proprietorship or single-member LLC if you want complete control. In a partnership or multi-member LLC, you will have to share control with your partners or the other Members. In a corporation, you will have a Board of Directors helping you make decisions, so if total control over the business is important to you, don’t incorporate.
Who receives the profits and the losses? If you want all the profits, you must assume all the losses. Set up as a sole proprietorship or an LLC to keep all the profits (after taxes, of course!). If you set up as a corporation, you will have to give some money to the other shareholders in the form of dividends.
Who pays the taxes? In a corporation, the business pays the income taxes, at the corporate tax rate. In most other forms, you can decide to pay taxes through your personal tax return, depending on your personal tax rate.
What is my liability? As a sole proprietor, you will have all of the business liability for bad debts of the business, as well as for other liabilities, such as for negligence, product liability, or professional liability. You can limit your liability by setting up an LLC or, even better, by forming a corporation. Because the corporation is a separate entity, you may be shielded personally from the liability of the corporation. This is a tricky area, so make sure you understand your personal liability in each of these forms of business. Find out more from your attorney before you make a decision.
In the end, whatever factor is most important to you will determine the form of business ownership you choose. Talk to your CPA and your attorney for more advice and information.
Still confused about business legal types? Sign up for my free online course Guide to Types of Business. You will receive seven email lessons in seven days.
Here are some questions to ask yourself as you consider what business legal form to use:
How much time and money does it take to set up? The costs range from minimal, for a sole proprietorship, to expensive, for a corporation. Here is a list, in order of cost from lowest to highest:
Sole Proprietorship
To start a sole proprietorship, all you need is a business license for your city, possibly a “fictitious name” statement, and a business checking account.
Partnership
To start a partnership, you will need an attorney to help you with the partnership agreement.
Limited Liability Company (LLC)
To start a Limited Liability Company, you will need to apply to your state Secretary of State to become an LLC, by filing Articles of Organization. You may be able to do this filing yourself, or you can get an attorney to help.
Corporation
To start a corporation, you will need to pay an attorney to help you set up your corporation correctly, in the state where you will be operating, including a corporate charter and by-laws.
What happens to the business if I am no longer there? If you want the business to continue, form a corporation, or put provisions in your partnership agreement or LLC operating agreement to allow the business to continue without you. If you choose a sole proprietorship, the business ends if you leave or die or can no longer run the business.
How much control do I have? Select a sole proprietorship or single-member LLC if you want complete control. In a partnership or multi-member LLC, you will have to share control with your partners or the other Members. In a corporation, you will have a Board of Directors helping you make decisions, so if total control over the business is important to you, don’t incorporate.
Who receives the profits and the losses? If you want all the profits, you must assume all the losses. Set up as a sole proprietorship or an LLC to keep all the profits (after taxes, of course!). If you set up as a corporation, you will have to give some money to the other shareholders in the form of dividends.
Who pays the taxes? In a corporation, the business pays the income taxes, at the corporate tax rate. In most other forms, you can decide to pay taxes through your personal tax return, depending on your personal tax rate.
What is my liability? As a sole proprietor, you will have all of the business liability for bad debts of the business, as well as for other liabilities, such as for negligence, product liability, or professional liability. You can limit your liability by setting up an LLC or, even better, by forming a corporation. Because the corporation is a separate entity, you may be shielded personally from the liability of the corporation. This is a tricky area, so make sure you understand your personal liability in each of these forms of business. Find out more from your attorney before you make a decision.
In the end, whatever factor is most important to you will determine the form of business ownership you choose. Talk to your CPA and your attorney for more advice and information.
Still confused about business legal types? Sign up for my free online course Guide to Types of Business. You will receive seven email lessons in seven days.
What is the Simplest Way to Start a Business? What is the Minimum I Need to Do?
Question: What is the Simplest Way to Start a Business? What is the Minimum I Need to Do?
For many people, business start-up seems overwhelming, with legal forms and insurance and tax issues. But starting a business does not need to be complicated or expensive. In response to a reader's question, here is a simple way to start a business:
Answer:
Business Start-up Simplified
Business start-up does not have to be complicated, lengthy, or difficult. You can start a business very quickly and simply. Let's assume you are working from home, you have no employees, and you don't need to borrow money to get started. Here is a simple business start-up plan to help you comply with tax laws and with local, state, and federal regulations and to set up your business the right way:
Select and Register Your Business Name
Every task involved with starting a business requires that you have a business name. So choosing a name is a critical task; if you select a name already being used by another business in your area, you could have problems, and if you decide you don't like the name, it would be costly to change that business name. Check with your state to see if another business is using the name you want, and register your business name with your state, before you start making other business decisions.
Become a Sole Proprietor
You can start as a sole proprietor, which requires nothing except a business license from your city. You don't need to register with your state unless you are required to charge sales tax, and you can use your social security number as your business number. To keep it really simple, you can use your name as your business name, so you don't need to file a d/b/a (fictitious name or trade name) application.
Work from Home
If you can work from home, you don't need to find a location and then pay rent to someone else. You can also deduct your home business/office expenses from your taxes, if you use that area of your home "regularly and exclusively" for business purposes.
Set up a Business Checking Account
You will need a business checking account and you should be careful to keep your business and personal finances separate, so there is no question that you have a separate business entity. The IRS looks at the separation between your business and personal expenses at audit to make sure your business is legitimately a separate entity and not just a hobby.
Buy Small Business Insurance
You probably don't need business property insurance, unless you have expensive special equipment. You might want to look at liability insurance. If you are doing contract work for someone else, and something happens, you may not be covered under their liability insurance. Check to see if you can get a rider for your personal insurance, or an umbrella liability policy.
Find a Tax Adviser
If your business is simple, your tax return will be too. You will be filing a Schedule C - Small Business Profit and Loss Statement with your personal 1040, and most competent CPA's can help you. You should check with your CPA as you start your business to make sure you are keeping track of all deductions. Then you only need to check once a quarter and at tax time. Depending on where you live, you might not have to spend more than $500 for the year on tax advice. This cost, of course, gets deducted from your income to reduce your taxable profits.
Set up an Accounting System
You will definitely need to set up a simple business accounting system. You can use online resources or financial software to make it easier. But since you are doing this to maximize your deductions and minimize taxes, spend the time to start out right by keeping track of all business expenses.
Certainly there is more you can do, including setting up a different business structure, hiring employees, and finding a business location, but when you are starting out or if you just want to remain a solo business owner, you can do well with these minimal steps to start-up.
For many people, business start-up seems overwhelming, with legal forms and insurance and tax issues. But starting a business does not need to be complicated or expensive. In response to a reader's question, here is a simple way to start a business:
Answer:
Business Start-up Simplified
Business start-up does not have to be complicated, lengthy, or difficult. You can start a business very quickly and simply. Let's assume you are working from home, you have no employees, and you don't need to borrow money to get started. Here is a simple business start-up plan to help you comply with tax laws and with local, state, and federal regulations and to set up your business the right way:
Select and Register Your Business Name
Every task involved with starting a business requires that you have a business name. So choosing a name is a critical task; if you select a name already being used by another business in your area, you could have problems, and if you decide you don't like the name, it would be costly to change that business name. Check with your state to see if another business is using the name you want, and register your business name with your state, before you start making other business decisions.
Become a Sole Proprietor
You can start as a sole proprietor, which requires nothing except a business license from your city. You don't need to register with your state unless you are required to charge sales tax, and you can use your social security number as your business number. To keep it really simple, you can use your name as your business name, so you don't need to file a d/b/a (fictitious name or trade name) application.
Work from Home
If you can work from home, you don't need to find a location and then pay rent to someone else. You can also deduct your home business/office expenses from your taxes, if you use that area of your home "regularly and exclusively" for business purposes.
Set up a Business Checking Account
You will need a business checking account and you should be careful to keep your business and personal finances separate, so there is no question that you have a separate business entity. The IRS looks at the separation between your business and personal expenses at audit to make sure your business is legitimately a separate entity and not just a hobby.
Buy Small Business Insurance
You probably don't need business property insurance, unless you have expensive special equipment. You might want to look at liability insurance. If you are doing contract work for someone else, and something happens, you may not be covered under their liability insurance. Check to see if you can get a rider for your personal insurance, or an umbrella liability policy.
Find a Tax Adviser
If your business is simple, your tax return will be too. You will be filing a Schedule C - Small Business Profit and Loss Statement with your personal 1040, and most competent CPA's can help you. You should check with your CPA as you start your business to make sure you are keeping track of all deductions. Then you only need to check once a quarter and at tax time. Depending on where you live, you might not have to spend more than $500 for the year on tax advice. This cost, of course, gets deducted from your income to reduce your taxable profits.
Set up an Accounting System
You will definitely need to set up a simple business accounting system. You can use online resources or financial software to make it easier. But since you are doing this to maximize your deductions and minimize taxes, spend the time to start out right by keeping track of all business expenses.
Certainly there is more you can do, including setting up a different business structure, hiring employees, and finding a business location, but when you are starting out or if you just want to remain a solo business owner, you can do well with these minimal steps to start-up.
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