You have spent hundreds of hours going over your Business Plan and you are optimistic that the company will succeed. Have you looked at the various advantages and disadvantages of incorporating your new business versus being a sole proprietor or a Limited Liability Corporation?
Perhaps the simplest form of operating is that of a sole proprietor – especially if the only employee you will have is yourself. You will not need a federal or state tax identification number for reporting wages. In many states and localities you will not need a license if you are operating out of your home. Additionally, you will have little or no legal fees for your start-up. You will have no corporate taxes of any kind to pay. All business will be transacted under your personal social security number. If you need a small business loan, your company will be judged on your personal credit rating.
Conversely, you will pay taxes on all of your profits at both federal and state personal tax rates. Depending on your net profits, this rate could be higher than what a corporation would pay. Also, you will have to pay self-employment taxes on your gross profits because they are considered earned income. You must not forget that in this instance you are personally responsible for all debts incurred.
If you choose to go into business as a Limited Liability Corporation (LLC) you have the option of the IRS considering you a sole proprietor or a corporation. If you go into the LLC as a sole proprietor, you have the option of simple sole proprietorship federal income taxation but without the personal liability of a sole proprietorship. You have to decide the best classification for your own circumstances. You will have a different tax identification number than your personal social security number. As the name indicates, as a member of the LLC your personal liability for the debt of the company will be limited. If something drastic happens, you will not lose all your personal ‘wealth.’
The major disadvantage is that it does cost money, generally at the state or local level, to open an LLC. You may incur attorney’s fees for consulting. If you are trying to obtain a small business loan, there may not be enough credit history under the new federal tax ID, so the subject of collateral may come up.
Firms, such as The Company Corporation, specialize in helping entrepreneurs decide which business format is most appropriate for their new enterprise. You can also check with your CPA or attorney about your options.
This article was submitted by Mary Branca, she has a Bachelors of Journalism from the University of Georgia and spent 20 years in marketing management with national companies in the Southeast, Northeast and Midwest. She has combined her marketing experience with her passion for writing.