There are myriad business formations in which you can operate, with the most ordinary being the sole proprietorship, the corporation (including S corps), and limited liability company (LLC). There are some states which limit your many options; for example California does not allow LLC for contractors. When deciding the best structure suitable for you, there are several important issues you must consider; expense and regulation, liability (risk), control and permanence (ability to transfer), and tax consequences.
- Expense and Regulation: The sole proprietorship is easily the least expensive to start and operate. If any, there are only a few state filing papers. You won’t need more than one checkbook for business and personal expenses. And you only need one accounting system and one tax form, the one you use for yourself.
LLC’s and corporations have filing fees, annual forms, additional tax returns and tax payments, their own bank accounts, and their own business accounting.
If you’re someone who doesn’t want additional expenses or reporting requirements, an entity organization may not be the best fit for you. - Risk:Suppose you sustain a liability not covered by your insurance. What is your exposure to lose? How much will you lose beyond your policy limits? Your savings? Your home? Your car?
If you’re looking to protect your personal assets, you might consider operating as an entity. When formed correctly, you shield your personal assets from mistakes you make in your business. - Control and Permanence: With a sole proprietorship, when you die, so does your business. If you’ve built a business expecting to pass it on to your heirs, this might not be the best way to go.
Operating as an entity affords your family the ability to transfer your business to them so that they may keep it operating. In the event they don’t want to keep your business going, an entity also allows them the opportunity to sell it to others.
The proper formation of an entity also allows for the financial participation by investors, while not giving them the benefit of operating the company. - Tax Consequences: As a sole proprietor, your income is reported on your individual tax return. It is also taxed at your individual rate.
Corporations pay their own corporate tax. Corporations require a careful analysis of cash and end of year profits to pay any promised bonuses; and there is also the possibility of double taxation on the profits of a corporation. Operating as an S-corp or an LLC will eliminate these problems at years end.
Entities permit you to take certain after tax necessities for your business and pay for them with pre-tax dollars, such as auto and truck leases. If you operate as an entity, you also will have the added benefit of retirement plans, which could give you additional tax saving deductions.
It's as easy as filing a document with your state to form a corporation or LLC. However to have a valid entity, there are there are many more documents that are necessary. When you form your entity either online or from a kit purchased at an office supply store, chances are some of these important and necessary documents will be missing. Failing to keep up proper entity documentation will jeopardize your liability limitations and possibly expose you to negative tax difficulties. Be sure to have the following documentation in order and readily available for anyone who requests it.
- Corporations: The required documentation are
- your bylaws,
- your tax id number (EIN),
- Your shareholder agreement for the election of the bank you will be using for your business,
- organizational minutes,
- your exemption election to be sure you are not subject to US SEC regulations,
- stock certificates and how they are to be apportioned,
- accounting ledgers,
- annual minutes,
- annual state filings,
Additionally, make certain you have your shareholder and director minutes for every year you have operated under the corporate structure. - your bylaws,
- S Corporations:In addition to all the above corporation documentation, for the S corp you will need a shareholder agreement for the election of S Corporation status and form 2553 filed with the IRS.
- LLC: You will need your tax id number (EIN) and an operating agreement, even if you are a single member LLC.
- Partnership: First, you will your tax id number (EIN). Next, you are required to have a partnership agreement and fictitious business name declaration. With a general partnership, each partner is equally responsible for all the liabilities of the business. You might want to consider one of the above entities, or a Limited Partnership, to accomplish maximum protection.
Watch for more on this in the coming months.
Comments
I am using AmeriLawyer to establish my C-Corporation in NY next month. Please view their website (www.amerilawyer.com) and advise what else is need outside of the package deal.