When beginning a business endeavor, the first decision that must be made is what type of business structure is the best suited for your purposes. This is not always an easy question to answer. This post discusses some common forms that small business owners choose. You should always discuss the options with an attorney.
The SOLE PROPRIETORSHIP is the oldest business form around because it has existed long before we even had laws. You’re a sole proprietor is you engage in a business. That’s it. If you give piano lessons to the neighborhood kids or sell lemonade on the sidewalk, you’re a sole proprietor.
There is no business entity involved with a sole proprietorship. No forms to fill out or file. No meetings. You establish it simply by engaging in that business. Thus, if you open a store front and sell vegetables or create a website and sell imprinted T-shirts, you are a sole proprietor of that business. It’s quick and easy.
Unfortunately, the quick and easy part leads to some other ramifications. In a sole proprietorship, YOU are the BUSINESS. There is no separation of personal and business liability. If something goes wrong with running your business, like bankruptcy or lawsuits, you will be personally liable. That means a creditor can go after your personal assets to settle the debt, or a court can attach your personal assets to pay a damage.
There can also be tax and other benefits by forming a business entity that are not available to sole proprietors.
However, that doesn’t mean everyone should form a company of some kind. It all depends on your personal situation, the business you’re in, the amount of money you are making and where your liability comes from.
We are always here to help answer your questions. Please Us a Message if you want to know more about the risks of being a sole proprietor or if you want to form a business entity.
The LIMITED LIABILITY COMPANY (or LLC) is the most common entity formed by small business owners. It provides the flexibility of a partnership and the liability protection of a corporation.
The SERIES LIMITED LIABILITY COMPANY is a newer variation of LLC, it is often beneficial for real estate investors with many properties. These allow a separation of liability among assets under one company umbrella. It mimics the “holding company” and “sub-company” structure, but without needing to file certificates of organization with the state for the sub-companies. This saves time and money by getting a layered asset protection structure without a bunch of entities. In a Series LLC, the “subs” are called “series.”
The IRA, LLC is a VERY specialized LLC that allows a retirement account to become a member (owner). This LLC is used in “Self-Direction,” which is a vehicle to use retirement account money (like IRAs) in real estate investment.
The CORPORATION is the traditional form, corporations come with additional benefits but with additional complexities. With lower overall taxes, however, more and more businesses are turning back to a corporate structure.
S-Corporations & S-LLCs: These are corporations or LLCs that have elected to be taxed under Sub-Chapter S of the IRS tax code. This election allows small businesses (earning ordinary income) and those earning 1099 income to save on employment taxes.
Non-Profit Corporations & LLCs: These are business entities that elect to be classified as non-profit organization that come with certain tax benefits.
Partnerships: Highly flexible, partnerships don’t usually come with any liability protection. You can be deemed to be in a partnership even without putting it in writing.