You want to start a business. It could be painting houses, making houses or walking dogs. At some point you will come upon the question of whether you should incorporate or be a sole proprietor. The purpose of this page is to help you answer that question and provide follow up guides and services. Here we cover common business entities such as the sole proprietorship, LLCs and corporations.
After choosing an entity, learn how to obtain your Employer Identification Number (EIN), file your periodic report, open a bank account, get a free phone number and more.
A sole proprietorship is when the person is the business. They are owned by one person and have no legal requirements to start. Many starting out opt for this default structure. They require no extra paperwork, but they pay more in taxes and offer no asset protection.
Unlimited Liability: A proprietorship has unlimited liability and the owner is responsible for all debt. You as the owner are also liable for all the debts of the business, if someone sues the business, they are suing you. The owner can be forced to sell personal belongings to pay down debts. This is known as unlimited liability and is a major downfall in being a proprietorship.
Higher Taxes: A sole prop pays the same taxes as a wage earner. This means no taking advantage of the new tax code for small businesses and paying too much in earned income taxes.
Not Professional: Doing business in your personal name is less professional. Clients and vendors know you have not registered with the state, that you cannot have any partners and can only grow so large. Having a business shows you're there for the long term and this is more than a side project.
Rather than spending a lot on insurance, and hoping to not be sued, you may form an LLC or a Corporation for additional protection. Each has better tax treatment which more than cover the minimal cost of incorporating with us.
Formal corporate structures, such as LLCs and Corporations, have some very attractive points and are similar in several ways. They exist as their own entities and are their own individuals in the eyes of the law.
Both LLCs and Corporations conduct business with the rights and responsibilities of a person. They are legally separate from their owners, and therefore responsible for their own debts.
This separation is what provides personal protection from company liabilities. Both entities protect owners from the negligent acts of other owners. Neither proprietorships nor partnerships offer this.
Since a company is its own entity, its life span is not linked to any person and so it can live forever. This is what it means for an entity to be of perpetual duration.
Corporations may find it easier to raise capital. Multiple share classes offer greater versatility which investors tend to favor. The downside is corporations pay more in taxes and have greater burdens when it comes to corporate governance.
Corporations are subject to double taxation which means that both the corporation's income is taxed and the income given to its owners through dividends is taxed as part of the owner's personal income. The only exception to double taxation is an S Corporation where owners report their shares as part of their personal income.
Corporations have more rigid operating structures and titles. For example, Corporations must have a President and a Board of Directors. Usually, the managers are not the owners in a corporation.
Most companies are now limited liability companies which offer the benefits of a corporation because of limited liability and the tax benefits of both partnerships and proprietorships.
Which business structure you should select is impacted by the amount of personal risk you want to be exposed to. When you are in a sole proprietorship or a partnership, then your personal assets can be put at risk if your company is sued. For this reason alone, we advise clients to consider forming limited liability companies and corporations. This process helps to segregate professional assets from personal assets during legal actions.
If there are multiple owners then you need an agreement. For LLCs this is called an operating agreement and for Corporations these are called the bylaws.
There are simple forms of each where every owner is treated equally. However, in some situations you may want more complex arrangements. For example, perhaps you wish for silent partners who only contribute money, but cannot make decisions or sign on the company’s behalf. In such a case an LLC is a good fit.
On the other hand, perhaps you want multiple classes of ownership. Some of whom have no voting rights, others who receive a guaranteed return before others, and another who does not share in profits until the fifth year. In this case, a Corporation is generally a better fit. Their bylaws and articles allow for much more complex arrangements. However, with such complexity comes additional cost. Leading us to our next question…
The final factor is the amount of money available for the structuring process. Individuals that have a limited budget often opt for an LLC. They provide asset protection and tax benefits along with some flexibility. Those that have money set aside, or more complex needs, can invest in a Corporation.
A corporation will be preferred in situations where a complex shareholder agreement is required. Otherwise, a limited liability company lowers costs and reduces corporate formalities. Unless you have received specific legal or accounting advice otherwise, it is generally preferable to form an llc.
From A to incorporated, we will file everything correctly the first time. We will put our information into the public record rather than yours.