One of the first decisions that must be made about your company is whether or not you are going to do business as a proprietorship, partnership, or as a corporation. The impact this has on your company is beyond just the name that it will add to your company. It had direct legal and tax consequences. The most basic form of small business in America is the sole proprietorship. This means that the person who created the company is the only one who is able to profit from the company. This type of business has many advantages that would seem ideal if you are starting a business on the side of your full-time job.
It is much simpler to file your taxes if you are registered as a sole proprietorship. The amount of money that will be required of you to create a business will also not be as high as if you were creating a corporation. You will also not have to worry about one day being forced out of your company by someone else who was able to buy a controlling portion.
The main negative of having a sole proprietorship is that you are liable for everything that happens to the business. That means if someone were to hurt them self at your business, you will be personally responsible. It will also be harder for you to raise funds after you initially start your business. If you believe that your company will need to grow substantially in the next few years, a sole proprietorship would not be the best choice. There is also the restriction on the name of your business should you live in one of the states that require you to name your business after yourself.
A partnership is when you and another person go into business for yourselves. This partner can be a single person or can be multiple people doing business under one name. The advantage of having a partnership is that you are able to raise the amount of capital you have by adding their capital to your own. This will help when it comes to bank loans. You are also able to have someone else to help you should you need help in deciding how to run a business.
The disadvantage to having a partnership is that you are not the only one who is in control of your business. The person who you entered into an agreement with is now able to have a voice in deciding what happens within the business. Some people who invest into companies prefer to keep as “silent partners” and only collecting from the profits of the business. One way to keep this situation in balance is to draw up a partnership proposal and figure out with the partner who much or how little involvement they are going to have in the business. This will likely require legal consult so that there is no disagreement about this in the future. Many people have made partnerships work so it should not be discouraged.
The last main type of business is the corporation. You may be confused about S-Corporation and C-Corporation. The main difference between these two is that for an S-Corp, you only have to pay taxes on your salary while in a C-Corp you will pay taxes on your salary plus corporate taxes on your profits. In a C-Corp though, you are able to sell more stock for your company than an S-Corp. Unless you are a large company, it would probably be better to go as an S-Corp.
When you create a company, another entity is formed. The company is different from you. Where as in a sole proprietorship you were liable for any damage that were to occur, when you have a company, the company is liable for the damage. In an S-Corp you are still liable for your own actions within the company. You will also sell stock of your company now in order to raise money. This means that you will need to arrange stockholder’s meetings to discuss the logistics of what happened to the company during the year.
A company is more easily able to raise money as well as market its product to the public. When you sell the stock in your company, you will receive money for every stock that you sell so that you can reinvest that money into your company. You will have to share the profits at the end of the year, but with the money you receive from people buying into your company you will be able to expand easier without having to use your personal money or to take out a loan with a bank.
You may also want to investigate having an LLC or Limited Liability Corporation. This structure essentially combines aspects of a partnership with a corporation. However, there is no partner or shareholder, only members. The corporation is its own entity still but the profits and losses are reflected in your own personal taxes. You do not need to have meetings with other members though. There is not even a requirement to have more than one member. You only need to file Articles of Organization with your state to operate. LLCs are considered relatively new since they were only introduced into the structure system in the 1990s.
There are many different ways that people can choose to run their business. It’s more than just a name, there are many advantages and disadvantages when it comes to choosing how you want to run your business.
