Sole Proprietorships, LLCs, C-corporations, and S-corporations...
As a small business owner, one of the first decisions you will make is deciding between the different types of business structures. But, choosing between business structures can be intimidating and confusing. So before you decide what business structure type to use for your small business, understand your options.
Easy to Form – Sole Proprietorships are the easiest, most common, and least expensive business structure. A person is essentially a walking, talking sole proprietorship in waiting. All you need to do is sell something—a product, a service, anything—and boom … suddenly you’re a sole proprietor. Aside from obtaining any required business licenses, a Sole Proprietorship requires no paperwork and no filing fees.
Decision Making – As suggested by the name, you are the sole decision-maker. You run your business the way you want to run your business, and you don’t have to ask permission from anybody.
Taxes – The IRS doesn’t view your Sole Proprietorship as a separate tax entity, so there’s no special or additional tax paperwork. You’ll simply file your taxes on the same 1040 form as any other individual.
Liability – The lack of separation between you and your business leaves you liable for all debts and legal claims against the business. You can even be responsible for your employees’ actions (if you have employees) while they are on the job.
Funding – Sole Proprietorships lack a specific structure for raising funds. You have no stock to sell, no set percentages to offer, and banks are often reluctant to offer loans to sole proprietors.
Business name– If you start a Sole Proprietorship, your business’s legal name is your name by default, a fact many potential sole proprietors might find unappealing. In such cases, however, a sole proprietor can register a “doing business as” name (or DBA) instead, but this option usually requires filing paperwork with the relevant state or county and paying a variable registration fee. The DBA option is also available for other business structures (including LLCs and corporations).
Limited Liability Company (LLC)
Liability – The greatest benefit of an LLC is its liability protection. Without a lot of aggressive work in the courtroom, if your business is involved in a lawsuit or judgment, your assets will likely not be seized.
Paperwork – Compared to corporations, LLCs have far less paperwork. They are less formal and have fewer requirements regarding resolutions and meetings.
Taxes – Profit flows through the company and straight to the members. There are no separate corporate taxes and no additional tax documents because your earnings are reported on your tax return.
Self-Employment Tax – Taxation is still simpler in an LLC than a corporation, but LLC members must pay non-deductible self-employment taxes (your share of Social Security and Medicare).
Treatment of Income – Regardless of whether a member’s share of the profits are distributed to him or her, that share of profits represents taxable income.
No Salary: LLC members cannot pay themselves ordinary wages.
"No matter what your reason for wanting to start your own business, developing the foundation is the same. Laying a solid foundation for your business will provide you with a road map to follow as you build your business. As you work through the process you will define the company's mission, decide what business entity is right for your business, name your business, determine the pricing for your products or services, formulate your financial projections, define your competitors, survey consumers regarding your products or services, determine the marketing methods right for your business, and more." --Jeanne A. Estes, author of Start a Business Step-by-Step Workbook
Liability – Like LLCs, C-corporations are legally distinct from their owners. This separation creates liability protection. Although this asset protection is not bulletproof, business creditors cannot easily seize your assets to pay a bad debt, and your personal assets are most likely safe from lawsuits against the corporation.
Funding – C-Corps benefit from multiple avenues through which to raise money. Stock can be sold, and many investors feel more secure investing in corporations because they are established business structures with a long legal history.
Employees – C-corporations can offer a range of benefits to employees that generally make working for the corporation more attractive than working for other business structures.
Keep Money In the Corporation – Although all corporations will pay their net income tax on net profits, those profits can be kept in the company without paying additional taxes on that money, which is attractive to those who want to build capital or otherwise invest in their company’s future.
Double-Taxation – If a C-corp issues dividends, the money issued to shareholders gets taxed twice. First, the money gets taxed by paying corporate income taxes. Second, shareholders must pay individual income taxes on dividends.
Formality – C-corps’ formal requirements – with boards of directors, official meetings, annual reports, and sometimes byzantine federal and state requirements – can make them slow and cumbersome to operate. C-corps must file more paperwork than any other type of business structure.
Versatility – S-corporations combine features of the C-corp and the LLC. They are taxed as a pass-through entity like an LLC, but S-corp members are also required to pay themselves what the IRS calls “reasonable” wages. Both LLCs and C-corps can elect to be taxed as an S-corporation.
Taxation – When an S-corp shareholder is also an employee of the business, he or she pays employment tax only on wages. This is a subtle but important difference from the ordinary LLC. LLC members usually pay employment tax on the net income of the business. With S-corps, however, the remaining income gets paid to the owner/employees as a distribution, so the member isn’t required to pay the 15.3% self-employment
Shareholder Limitations – S-corps are limited to 100 shareholders or less, and all shareholders must be US citizens. Corporations and partnerships cannot be shareholders. Additionally, S-corps can only issue one class of shares.
IRS Attention – With an S-corp, you may run the risk of greater scrutiny from the IRS at tax time, as some business owners in the past have tried to pay themselves low wages and take big dividend distributions to save money on taxes. If you do elect to be taxed as an S-corp, you’ll want to document the reasons behind the wage you decided to pay yourself.
This month we shine the spotlight on Joi Smith. Owner and Operator of CLONE LLC.
CLONE is the personal assistant to the everyday person. CLONE provides services such as:
Detail Cleaning, Vacation rental housekeeping, Post Construction Cleaning, Hauling, Cleanouts, Lead Safe Technician, Project/ Property Management, Administrative Support
Personal Shopper, Laundry Service, Courier Service. CLONE is also an EPA certified firm
During the interview with the experts, Joi talks about coming from a family of hustlers' and all of the experiences that she had gained from working at other jobs help to build her business. Ms. Smith also talked about the need for entrepreneurs and business owners to be more proactive in their business pursuits. Joi mentions that entrepreneurs should count the cost when going into business - "When I was an employee and I went out the night before and had too much to drinks, that job may not see me in the next day. But now that I am a business owner I can't make that excuse because I have a responsibility now.
When asked what advice that she would give to new entrepreneurs and small business owners, Joi said - "Make a plan and follow through. A plan will allow things to move smoother and give you the measures to meet your goal".
For more information on CLONE or to learn more and apply for a job, please call (856)-500-3191 or 267-945-9737 or email firstname.lastname@example.org.
See the full interview with Joi Smith on BSF Designs YouTube page and Facebook page.
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If you know of someone who officially owns his or her business, is an expert in his or her field, and is willing to be interviewed; please contact us with information email@example.com.
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