
Why are you registering your business?
- You become credible when you are conducting a transaction as a business rather than an individual person.
- You can start building your business credit. A company’s credit is separate from the owner. The company can apply for its own line of credit, credit cards, business loans, and sometimes supplier’s in-house credits.
- Save or reduce taxes. A corporation or an LLC will always have tax advantages that save you money.
- A business entity can reduce your liability as it is always separate from the owner. It will protect your personal assets from business debts and lawsuits.
I personally recommend using a company like MyCompanyWorks when trying to register a business. This will save you from having to file the paperwork yourself and the after-formation task like adopting Corporate Bylaws or an LLC Operating Agreement by holding an Organizational Meeting. I have used their services to register 4 of my current businesses.
When I was in the stage of planning to register my business, I took a lot of time to research what type of business I will need to register. I also ask an accountant about the pros and cons of each different type of business entity.
Business Start Up Check List
What are the different types of business structure?
Sole Proprietorship
A business owned by one person or a married couple is called a sole proprietorship.
Pros:
- Establishing this type is the quickest and easiest, not to mention the least expensive.
- The business’ total ownership and control are all yours. Even all its profits go to the owner.
- On business profits, no double taxation (additional Federal Taxation)
- Periodic business reporting to the IRS or other government agencies is non-required.
- Easy income tax filing because it is part of your annual personal tax return.
Cons:
- As the owner, you are personally liable for everything inside the business. That includes: business debt and liabilities incur, and it is not limited to the value of the business.
- You (owner) may find it difficult to borrow money or ask someone to invest.
- Without its owner or if no longer capable, business is likely to go down.
- All responsibility for management rests with the owner, which can be a heavy burden.
Partnership
The business are owned by two or more persons. But depending on the type of ownership of the owners– it can be classified as General Partnership or Limited Partnership. In General Partnership, it’s almost the same with Sole Proprietorship. Everything in the company is owned by two or more persons. Limited Partnership is categorized into two types of partners. The general partners are the one who manages everything and assumes liability for the business. The other partners are called limited partners. They don’t have control over the business and assumes only fewer liabilities. Basically, they only act as investors.
Pros:
- Partners will share liabilities.
- Combined different expertise of the partners– teamwork or cooperation is achieved.
- In the form of a loan, investments can come from partners. It creates interest income for the partners. As well as a business deduction for the partnership.
- No Federal income taxes. Rather an IRS Form 1065 (Informational Tax Return) need filed. It should show each partners’ pass-through of income/loss.
Cons:
- Misunderstandings, different goals or point-of-view, etc. can become a problem with partners. Such issues weaken or destroy the partnership.
- It may become complex for the formation and subsequent structural changes.
- General Partners have unlimited liability. In limited liability, it’s only the owner. Unless the limited partners are active managers in the business.
Limited Liability Company (LLC)
If you combine some principles of corporation and partnership you’ll have an LLC. It is sometimes best to describe as a hybrid of both entity types.
Pros:
- Limited personal liability for the owners.
- No Federal taxes.
- An unlimited number of stockholders.
- It allows more than one class of stock.
- Deduction on your personal tax return for business losses is allowed.
Cons:
- From setting up to paperwork, LLC is complex. You need legal assistance for it.
- States law requires that an LLC should have more than one member.
- Unlike corporations, LLC dissolves if one owner leaves or dies unless there is a special formal agreement between owners.
Corporation
Usually, corporations are big companies. The organization is separate legal entities from their owners or shareholders. What does that mean? It means they have limited liability. This one is too complex to setup. You need an attorney and an accountant.
Pros:
- Limited liability means that the shareholders (the owners) are not personally liable to any debts or other liabilities that the company may incur.
- Pooling money from shareholders makes it the easiest among the others to obtain business capital.
- Less personal tax for the owners because the profits are divided among them and the corporation.
- The taxes are also favorable for employee fringe benefits.
- Unless stock is purchased with borrowed money, 70% of any dividends received from the stock investments by the corporation are deductible.
- The corporation continues even if the ownership changes or an owner dies.
Cons:
- Setting it up is expensive and complex.
- Corporate fees are recurring annually.
- Unless you can do it, you need an accountant for completing tax returns. That’s how complex it is.
- The corporation pays taxes and the owners pay personal taxes (Double Taxation).
- The corporation will not deduct for business losses.
- Profits greater than approximately $75,000, tax rates are higher than individual rates. And profits in excess of $250,000– accumulate 28% tax earnings.
- More paperwork, and filing.
S-Corporation
Like corporations, S-Corporations still has the limited liability advantage. It almost feels like a sole proprietorship or partnership but bigger. Like a corporation, this one is also complex to setup. You need an attorney and an accountant.
Pros:
- Limited liability
- Double taxation for profit/losses is not passed to owners.
- Rules are like a regular corporation. It cant be dissolve even if the owner dies or left the company.
- Enabled to have wholly-owned subsidiaries.
- In most cases– no state income tax. But definitely no Federal income tax liability.
Cons:
- Too complicated to set up. Legal assistance required.
- More paperwork and complicated filings.
- By law, it can only allow a maximum of 75 shareholders.
- No preferred stock as only one class of common stock permitted.
What else you need to do?
In order to complete the registration, here’s a checklist of things you need to prepare or do:
- Select a unique name and business entity (legal structure) for your business.
- Prepare your business plan.
- Apply and obtain your Federal Employer Identification Number (FEIN).
- Open a bank account for the company.
- If not home-based– lease an office, retail space, or warehouse.
- Get licenses and permits such as State License(if required), Federal Permits (if required), and Sale Tax Permit, and Business License
See Also: Different Types of Business Entities