How to Organize a Startup Business - Sole Prop - LLC – Incorporate
When starting a business you might want to decide on what type of business you would like to venture into, choosing whether to go into a Sole Proprietorship, Limited Liability Corporation (LLC), or a Corporation. You must have solid knowledge of these three forms of business organizations before deciding which to use.
The three business forms mentioned above are classified according to the ownership structure of an entity.
Sole Proprietorship
An individual proprietorship is usually popular for most small businesses owned and operated by a single individual called the proprietor. It tends to be a small service type and/or retail establishment. As a sole owner you are personally liable for all the obligations your business is going to incur. The proprietor receives all the profit earned and absorbs losses.
The good thing about this type of business ownership is that it is:
- Easier to set up and can even operate the business under your name and no need of registering it.
On the other hand as a sole owner, if your business fails:
- You assume all liabilities to the extent of seizing your business assets as well as personal assets for the settlement of any liabilities incurred. The owner is solely responsible for all the debts.
Setting up a sole proprietorship entails less effort. This would include:
- Determine licenses and permits to be needed and how to acquire them.
- Business name must be duly registered in the state or country where you will be operating
- Comply with IRS requirements, including procurement of employer ID number. If you are paying wages for staffs, then you must also secure for yourself a state ID number with the Department of Revenue.
Limited Liability Corporation
This is a type of corporation where owners have a limited liability exposure to any of company’s actions. Personal assets of owners are secured in case of any legal obligations that the corporation might encounter. This is basically a fusion of both partnership and corporation having the characteristics of each.
Let us look on some of its advantages.
• Limited liability – it provides protection for its members in the event of any liabilities incurred by it and they are liable only up to the extent of their investments.
• Exemption from double taxation – This type of business structure avoids double taxation in a way that profits generated by it are divided amongst members and report it on their individual federal tax returns. No federal tax will be paid before distribution of profits to its members.
• LLC is easy to set up and operation is simple compared to a corporation.
How to set up an LLC?
- Create a name for it which must conform to state rules
- Articles of organization must be properly made and payment of filing fee
- Operating agreement must be made comprising the rights and responsibilities of its members
- Secure licenses and permits required in the operation
Corporation
This is a type of business structure wherein it is created by the operation of law, having the rights of succession and the powers, characteristics and properties expressly authorized by law and any incidents to its existence. It has a separate legal entity having a juridical personality separate and distinct from its owners.
It is a complex structure involving a lot of process and paperwork. Management of it is vested on the Board of Directors. It has also the right of succession with the capacity of continued existence regardless of death, insolvency, withdrawal or incapacity of its stockholders and directors.
Forming a corporation can be quite complex and this would include:
- Secure the requirements for incorporating in the state where you will be operating your business.
- Acquire a certificate of incorporation from the secretary of state
- Create a name for it
- Other requirements including selection of the board of directors, stocks to be issued and organizers for the registration of the company.
- Properly filling out certificate of incorporation and payment of filing fees.
- When approved, assemble the first stockholder’s meeting and select officers, by-laws and other important decisions.
- Secure a corporate seal and letterhead.
Incorporation of sole proprietorships
Many small business starting as sole proprietorship eventually decide to incorporate. However, there are some disadvantages coupled with such incorporation and here are some of those:
• Preparation of two tax returns, your personal income and that of the corporation. Preparation of which would mean additional accounting fees to be paid.
• Losses of the corporation cannot be deducted to your personal income, unlike when you are in a sole proprietorship where losses are considered to be an allowable deduction.
• Increased paperwork. More documents are maintained in corporation which would include minutes of the meeting, register of directors, corporate by laws and other documents essential in the operation of it.
• As a corporation, anything earned is taxed. No tax credit is given compared to when you are a sole proprietor you may be subject for tax credit.
• Expensive and complex registration. It involves a lot of serious work since it is a complex legal structure created by operation of law. Legal work, intricate accounting system and tax reporting requirements are also disadvantages.
• Higher income taxes are levied to corporations in some states.
