When starting a new small business, one of the first decisions you must make is to decide what type of business entity your business will be. This decision is not to be made lightly. Do your research and talk to a lawyer before you make any decisions. To get you started with your research, we will give you some of the basics.
Starting your new small business as a Sole Proprietor is the easiest way to get things rolling. The owner and business are treated as one entity, therefore, your profits are taxed at the owner’s individual federal tax rate. There is no need to file additional tax statements for your business. However, with this type of entity, you are not protected from liability – the owner’s personal assets are not protected because the company and the individual are treated as one entity. You may need to file for a DBA (doing business as) or Fictitious Business Name from you county, city or state government offices. And it is always a good idea to have your personal and business bank accounts separate for accounting purposes.
There are a few different types of Partnerships. In a General Partnership, consisting of two or more parties, capital put into the company is usually equal. As is the liability, profits and loss. As with the Sole Proprietor, the General Partnership is treated as one entity. This can be overcome to some extent by using the Limited Partnership structure where one partner acts as the controlling partner. A Certificate of Limited Partnership is usually required by the Secretary of State.
A Limited Liability Company is a similar to a Sole Proprietor in that it can be owned by one person and can be taxed on an individual basis, if you choose, as a Sole Proprietor. But the Limited Liability Company is not as easy to start as a Sole Proprietor. Check with your county, city or state government to see what type of paperwork you need to file on a yearly basis and why types of fees are required. This type of entity does have the advantage of limited liability for business debts and obligations. LLC must become part of the business name and must be visible at all times.
A Corporation is a legal business entity that is completely separate from its owners where the owners are not personally responsible for the debts of the corporation. Unlike the other entities above, the Corporation can sell stocks and bonds to help generate capital for the business. Taxes are paid on both corporate profits and shareholder dividends. Paperwork to form a corporation is the most extensive of all the entities.
With any business decision, you must do your research to make sure your decision is best for you and your business. Talking to a lawyer and letting him go over your paperwork is always a good idea. Starting a small business is a lot of work, but if done properly, it can be very rewarding.
