Sole Owner, Partnerships and Corporations
There are many rituals, requirements and legalities surrounding the business world. If you aren’t ready for these you could find yourself being fined or in financial hardships...
When you start or engage in any business or profession you are statutorily personally liable unless you take special steps the limit this liability, which means separating personal assets and income from those involved in the business.
When one person starts a business they are automatically a “sole proprietor.” When more than one person is involved in the business it is automatically a “partnership” and each partner is both personally and professionally responsible for the actions and business debts of the other partners.
There are ways to limit your liabilities but this requires meeting all laws regarding starting a business in your area, plus payment of additional costs to form what is called a “limited liability corporation” or an “S-Corporation.”
For those with bigger businesses there is also a full or standard corporation.
A corporation is an entity, much like a person. A full, normal or traditional corporation, however, has to pay separate taxes like an individual. An LLC or S-Corporation does not. Instead the individuals involved in the Corporation pay taxes on any income distributed by the Corporation.
Because a Corporation is an entity if the business gets into trouble financially or gets sued the Corporate entity faces the music alone, not the people running the corporation. Your home, day job income, retirement plan and investment income is not subject to any attachment unless fowl play is involved. If government determines you formed the Corporation to protect assets in some type of scam operation or you have hidden Corporate assets into your private assets then you might have to face the music on a personal level. If, however, your Corporate business was well run and managed and simply got into trouble in the normal course of doing business only the business assets and income face action in the courts.
Starting a Corporations, even an S-Corporation is, however, starting to get more and more expensive. A few states, such as, for example, California, have adopted minimum taxes for this entities amounting to as much as $2,000 even if you make no income at all during the year! In other states, however, it’s as simply as filling out some forms and paying about $500 in total fees the first year. There are many law firms that will supply your entire package and do the work for you at a modest cost, generally $500 to $800 for most states. You can even get a mailing address and mail forwarding from some firms in some states, so that you can start your S-Corporation in a state with lower start-up fees or fewer regulations even if you live in another state.
You can also find do-it-yourself books for starting S-Corporations in some states. These are written by lawyers and sell for about $30.
The same applies for a full corporation, with Delaware being the national leader of low fees, few regulations and small taxes for corporate structures.
In order to be a S-Corporation you need to make under a certain amount yearly (generally less than a million dollars) and have a very small amount of stock holders or shares of stock (generally under 100). If you make too much money or have too many stock holders you have to create a full or standard Corporation and face yearly Corporate taxes on top of tax on the distributed income which is filed by each individual.
Just because you start a corporation, however, doesn’t mean you can sell stock openly in your company. Public stock offerings are expensive to start, require legal filings and have to be sold only through licensed brokers.