Which Kind of Business Should You Create?

Sole proprietorship, S corp, or LLC. What does it all mean for you? Choosing how you structure your business may be one of the most important decisions you make when starting out as a contractor. Here’s what you need to know.

Sole Proprietorship

When people start to work for themselves, a sole proprietorship is basically the default. Contractors who operate under a name different than their own may need to file a notice with local or state government that they are “doing business as” that name. In a sole proprietorship, you and your business are, in effect, one and the same. You claim all the profits, but you also encounter all the liability. If you have any problems with creditors within the scope of your business as a sole proprietor, you may be held personally liable. In many cases, people start a business as a sole proprietorship but shift to another form to protect their personal assets.

Limited Liability Company

Liability can be an intimidating concept, especially if you have a home or personal assets that you need or want to keep separate from your business dealings. This is why many business owners eventually create a limited liability company, commonly referred to as an LLC. An LLC is not a corporation, which means that you can own an LLC and still simply claim your business income on your personal income taxes. LLCs can function with a sole proprietor or a partnership. You do not need to officially incorporate to create an LLC, but you may need a business license and to file articles of organization.

Partnership

It’s not uncommon to decide that you would like to go into business with another person. In this instance, it is usually best to carefully outline your expectations and get financial and legal advice before you agree to anything in writing. A partnership can be a little like a sole proprietorship, except with more than one person. In a general partnership, all partners contribute to the business and split profits according to their agreement. General partners also face unlimited liability, as with a sole proprietorship. People who create a limited partnership limit the liability they can face personally.

Pass-Through Entities

Although liability is a common reason to make various choices concerning the way you do business, taxation is another. Setting up a business that allows you to claim all the profits as income (or a share of the profits, as a partner) is known as a “pass-through entity.” In a sole proprietorship, partnership and LLC, the profits for the business are only taxed once, on the personal income of the owner or owners. This is an obvious benefit for many small businesses with only a couple of employees. However, there are reasons to consider other kinds of company structures, such as incorporation.

Incorporation

Creating a corporation is a completely different arrangement than having a sole proprietorship, partnership or LLC. A corporation has its own legal entity separate from its owners, who own shares in the corporation. People decide to incorporate when they want to have the benefit of limited liability, but also to protect the corporation in the case of an unexpected event, such as the death of an owner. Corporations require separate tax returns, and pay an income to owners instead of simply splitting the profits.

S Corp vs C Corp

Although all corporations become C corporations by default once they file articles of incorporation with the state, you may have heard about subchapter S corporations, as well. An S corp is a corporation that retains the benefits of limited liability, but allows owners to claim profits on their personal income taxes. Businesses that want to incorporate must specifically elect to create an S corp, because it changes the taxation structure. Check out the CSLS corporation setup service to learn more about incorporating your business.

Figuring out the best route for the way you intend to do business requires an understanding of the types of businesses you can create, and expert advice to help you decide what to do. To learn more about how you can start your own business as a contractor, contact us at CSLS today!