Opening your own business can sometimes feel like a step off the high dive. There you are, climbing higher and higher towards your goal, when you suddenly take the leap and see if you can fly.
One of the rungs on the ladder that you are climbing is choosing a business structure. There are three things to consider when you are choosing between a sole proprietorship / partnership structure, a limited liability company or a corporation.
1. What is your tolerance for regulations?
Of the three choices, corporations require the most paperwork and involve the most government oversight. To create a corporation, you file articles of incorporation with your secretary of state. You will also be required to file annual reports with the secretary of state.
Limited Liability Companies also register with the secretary of state. LLCs file articles of organization with the secretary of state. The LLC also has on hand an operating agreement that details the rights and responsibilities of each member of the company.
A sole proprietorship or partnership involves the least amount of government oversight. In order to open accounts in the business name, you will need to record a certificate of assumed business name with the county in which you do business. Other than that, you are on your way.
2. How will your firm raise capital?
If your firm intends to use its members individual assets for the start up costs, or even a loan, an LLC or a sole proprietorship / partnership is an ideal vehicle for this capital-raising model. But if you intend to woo venture capitalists, your best option is a coproration. Corporations also have the advantage of allowing you to sell stock, either privately or in a public sale, to generate even more capital.
3. What taxes do you want to pay?
The short answer to this one is probably: none. But if we accept that taxes are a part of life, we then may want to consider what taxes are we paying? How can we reduce our tax burden?
Corporations pay a corporate tax on all profit earned by the corporation. The employees also pay a separate income tax on all income earned from the corporation. This is often referred to as “double taxation.”
Limited liability companies, on the other hand, use a form of taxation known as “pass through taxation.” In this model, business profits are not considered income and are not subject to the self employment tax. Each member only reports on his personal taxes the amount of income he earned from the business. This reduces the amount of tax the business income is subject to.
In a sole proprietorship or partnership, the business income is passed down in its entirety to the individuals, and is all subject to the self-employment tax.
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ABOUT KJD LEGAL
Established in 2012, KJD Legal provides strategic legal consultation services to families and small businesses. Kathy Catlin Davis, Esq. has more than nineteen years of experience in the real estate industry, and has been a practicing attorney for more than eleven years.