Registering Your Business
You have a vision for your company, but you need to lay the framework before you can get started. Read accounts from small business owners and see what our legal expert, Ryan Jaghab, Esq., MBA from Morgan & Morgan, P.A., recommends when it comes time to register your business.
Incorporating vs. Sole Proprietorship
Form a corporation, even if there's just one person. I got advice that I should have never listened to, to remain a sole proprietorship. That decision cost me thousands of dollars! The tax implications caused all of the money that I made to be considered taxable income. Self-employment taxes were also based on the full amount, which means more for Medicare and Social Security. I've since formed an S-Corp. and now get taxed on the income I receive as a member of my business, instead of bearing the tax burden of the whole amount. Yes it costs more to form a corporation and to get the taxes prepared, but in the long run, there are benefits that make it worth the effort – both from a tax and legal standpoint.
Nathan Kirk, Owner, Nathan Kirk Design, LLC
When forming a business, the first step is deciding what type of entity is best for your company. The most common types are: corporation, partnership, and limited liability corporation (LLC).
- A corporation is an independent legal entity that exists separately from the people who own, control, and manage it. A corporation can enter into contracts, pay taxes, transact business, etc. It's considered a separate “person” so the owners have limited liability. This also means it doesn't dissolve when the owners die.
- A partnership exists when two or more persons co-own a business and have a share in its profits and losses. Each of the co-owners or partners contribute something, usually money or real property, to the business endeavor. There are two main types of partnerships: general and limited.
- A general partnership is where the rights and responsibilities are divided equally among the partners. The partners are referred to as general partners because each partner can act on behalf of all the partners, and each partner is responsible for the partnership's debts and obligations.
- A limited partnership is a partnership comprised of both general and limited partners. This type allows each partner to determine and/or limit their own personal liability. Unlike general partners, limited partners are not responsible for the partnership's actions, debts, and/or obligations. General partners also have the right to manage the business whereas limited partners do not. However, both general and limited partners benefit from the business' profits.
- A limited liability corporation (LLC) is similar to a corporation, but has minor differences. Like a corporation, an LLC offers limited personal liability. However, it's not required to hold regular stockholder or management meetings and there are no requirements to comply with other corporate formalities.
- Sole proprietorship is another option. A sole proprietor is a person who directly owns all assets used in the business. It's not a legal entity and does not file a formation document with a state agency. Like Nathan Kirk mentioned, a drawback of a sole proprietorship is that the owner is personally liable for business debts. For this reason, it's strongly discouraged as a form of business.
While reviewing your registration options, you should consider:
- The degree to which your personal assets are at risk from liabilities arising from your business
- How to best pursue tax advantages and avoid multiple layers of taxation
- The ability to attract potential investors
- The ability to offer ownership interests to key employees
- The costs of operating and maintaining the business entity
Keep in mind that there's no one size fits all when it comes to choosing what business entity form is best for your company. Weigh the advantages and disadvantages of each factor as it applies to your particular business.
Researching Tax Structures
I wish I was better aware of tax structures. In my first year of business (this business was a single member LLC), I did not file an election with the IRS to pay taxes as an S-Corp. If I had done this, I would saved a considerable amount of money on taxes. Most LLC's stick with the default form of taxation and this is often a mistake (assuming that you are a business owner that is interested in paying the least amount of taxes that is legally possible).
Andrew Graham, Owner, The Kratom Connection
Your tax classification is important because it changes how tax rules are applied. For tax purposes, a business entity is either treated as a disregarded entity, C-corporation, S-corporation, or partnership.
- A disregarded entity is a business entity with a single owner. It's generally ignored for tax purposes even though it's a separate legal entity by state law purposes. The owner reports the entity's income and expenses on their own income tax return.
- C-corporations are the most common corporate form. Their income is usually subject to two levels of federal income tax, one at the corporate level when earned and one at the shareholder level when profits are distributed. Besides S-corporations, all corporations are classified this way.
- S-corporations are less common than C-corporations. They treat the entity as a “pass-through” so they don't pay an entity level tax. Profits and losses, therefore, pass through to its shareholders. Those individuals report their respective shares on their federal income tax return and are taxed that way. The substantial limitations on S-corporations contribute to its unpopularity. There are restrictions on the number, type, and residency of the entity's shareholders, for example.
- Similar to S-corporations, partnerships are treated as “pass-through” entities and don't pay entity level taxes. Under this tax structure, the profits and losses are allocated to the partners who include them on their personal income tax returns. Unlike S-corporations that impose regulations on the shareholders, partnerships include no such limitations. For this reason, partnerships are more common among businesses interested in “pass-through” taxation.
When it comes to handling your taxes, if things begin to look confusing, spend the money to have a professional review them. You may save money like Andrew Graham recommends, but it can also save you from legal problems down the road – having a lawyer defend your business against tax fraud can be costly.
You don't have to do this alone. Turn to our trusted partners at Morgan & Morgan, P.A. for award-winning legal counsel. Contact Ryan Jaghab, Esq., MBA, today at 904-361-7196 or firstname.lastname@example.org for information on how Morgan & Morgan, P.A. can serve the individual needs of yourself or your business.
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