As one of the leading Burbank Accounting Firms, we’re glad to provide useful information that may help you in establishing your business.
You have made the big leap for various reasons to open your own business. The thought of being without a safety net can be daunting and there are so many things that you don’t know combined with great uncertainty, the whole thing can feel overwhelming. The good news is you’re joining a large group of individuals. There are over 28 million small businesses which is 99% of all firms and the vast majority have less then 20 employees with 40% grossing less then 100,000 dollars. Besides the independence and capability to make ultimate decisions, a reliable source to wealth and financial independence has been found consistently with small business ownership.
Your first choice is what type of entity do you want to create? If you are the only owner then this avails many opportunities, without getting too specific, most entities will be sole proprietorships, partnerships, or corporations. There are entities that have functions of a partnership but are corporations such as LLCs and S Corporations.
The general reason to create an entity such as a corporation is to separate yourself for legal protections and to “wall off” your personal and business interests. A corporation also survives indefinitely and will not be dependent on the life of the founder. The negative of a traditional corporation called a C Corporation is primarily double taxation as you will be taxed at the corporate level and for any income that you take out from the entity. This is why an S Corporation is popular as it allows for the protection of a corporation but flows all its net profits to ownership at the personal level. You do need to be careful about states as they don’t always follow the same rules as federal and there may be taxation or franchise fees at the corporate level.
LLC is popular because you can have it be a corporation, S Corporation, or partnership and it has great protection for assets so is popular for real estate interests. The primary negative is it is treated similar to a partnership in that you can’t take out salaries and instead draws are the typical manner of taking money out of the entity and owners would be taxed at the individual level based on your proportional profits of the company.
What is clear all entities have positives and negatives. The main thing is to understand what your business is trying to accomplish and try to set up entities that will accentuate those needs. If you’re hoping for investors and plan to issue stock, a C Corporation will be attractive. If you have minimal amounts of money and can’t afford annual and franchise fees then starting off as a sole proprietorship may be the right choice. If you’re starting with multiple partners then a partnership would be a good option.
A conversation with your CPA is invaluable to getting clarification so that from a long term perspective you have the right entity moving forward to reflect the direction your business will be headed for on its way to success.
We’re glad to help you determine your entity type, feel free to contact us anytime!