Getting Started
When starting a new business, there are many decisions to be made. One of the first and most important decisions is deciding the legal form in which you will operate your business. Working with a certified public accountant can help you determine the best structure for your dream business. Each type of business formation has various advantages and disadvantages, and you must carefully consider how each entity type will work with both your personal and business plans.
Sole Proprietors
Sole proprietorships are the easiest and least expensive business entities to set up. They can be operated with few formalities. One disadvantage is that they offer no personal liability protection. Additionally, many of the tax benefits that are available to corporations are not available to sole proprietors.
Partnerships
Partnerships are similar to sole proprietorships, but they allow the business to be owned and operated by more than one person. If you and a friend own an LLC together, you are by default a partnership and would be required to file a separate tax return. Limited partnerships, where one or more of the owners are not involved in the day-to-day management of the business, may protect some partners from personal liability but the general partner would be on the hook for any actions the partnership took.
LLCs
Limited liability companies (LLCs) are a relatively recent addition to the various business entity types. They are generally taxed as partnerships, avoiding corporate income tax, and are protected from personal liability from business creditors.
S Corporations
S corporations are a true hybrid of LLCs and regular C corporations. They can offer liability protection without the dreaded ‘double taxation’ that can come with paying corporate tax. Shareholders pay income tax on their wages and any net income passed through to them from the S corporation. A disadvantage is that over 2% of shareholders are ineligible for tax-favored fringe benefits. In addition, since there are limits on the number of shareholders, the growth potential and access to capital may be limited.
C Corporations
C corporations are subject to double taxation. The profit is taxed at the corporate level, and any profit distributed as dividends to shareholders is taxed to the shareholder. This double taxation can cause the C corporation to be a more expensive option for small business owners. However, if the profits are reinvested into the corporation, the tax can actually be lower than with an S corporation. An advantage of this type of business entity is that shareholders who are also employees qualify for corporate tax-favored fringe benefits such as medical insurance and group-term life.
Wrapping up
Once you decide what type of business entity to use for your business, you need to plan for your income and payroll tax reporting, budgeting, startup costs, retirement plan, and whether you will hire employees or independent contractors.
I’m certain you will have many questions to ask. I’m equally certain that I can help you make the appropriate decisions and implement them efficiently, so that you can concentrate on the success of your new business. When you’re ready, give me a call and we’ll schedule a time to meet.
Thank you – Chris Nash, Certified Public Accountant