The entrepreneurship spirit is in full swing and more and more individuals are starting their own business, both full-time careers and part-time side jobs to supplement income. Regardless of the amount of time an individual intends to spend on their adventure, the quantity of goods an individual sells or the frequency an individual provides services, a business is a business, and as a result, you need to decide what type of business entity is the best for you.
Whether an individual intended or desired to start a business is irrelevant, if an individual is providing goods or services, on his/her own, he/she automatically becomes a sole proprietor. A sole proprietorship is an unincorporated business owned and run by one individual with no distinction between the business and the individual. There are no formal steps an individual need to take, so long as the individual is the only owner, the individual simply provides the goods or services and lists the income made from the business on the individual’s personal tax return. The benefits of a sole proprietorship are: 1) it is inexpensive to form; 2) the individual has complete contract; and 3) easy tax preparation. The disadvantages of a sole proprietorship are: 1) unlimited personal liability and 2) impractical business entity to raise money.
The second type of entity you may be is a partnership. A partnership is similar to that of a sole proprietorship, with one distinct difference, there are two or more owners. Therefore, with a partnership, you still have the benefits that come with being a sole proprietorship, including the cheap cost to form and the easy tax preparation. However, the disadvantages that exist for sole proprietors also exist for
partnership, the main one being unlimited personal liability for the debts of the partnership. Therefore, if the partnership was unable to repay a loan or if the partnership was sued and was ordered to pay a judgment, the partners would be personally responsible for both the loan and the judgment if the partnership did not have the funds to pay.
The unlimited personal liability that comes with being a sole proprietorship and partnership generally push individuals who are operating a business to incorporate a different type of business entity that provides limited liability to the owner. Limited liability is where the individual’s financial liability in the company is limited, generally, to the amount of the individual’s investment with the company. With
limited liability, a person cannot go after the individual’s other personal assets. There are a number of entities that provide limited liability to the owners. Those entities include: 1) a limited liability company; 2) a corporation, both subchapter C and S; and 3) a limited partnership. In addition to the limited liability, there are additional benefits, and some shortfalls, that come with those entities.
If you have recently started a business, or have been operating a business for some time without having taken any steps to form a registered entity, and would like to learn more about the benefits that come with having a registered entity, please contact us to set up an appointment.