“A corporation’s capital,” Baker says, “can be expanded at any time in a private offering by issuing and selling additional shares of stock. This is especially helpful when banks are being tight with money.”
Another important question to ask yourself is, “What do I want to happen to the business when I’m no longer around to run it?” While a sole proprietorship or partnership may dissolve upon the death of its owner or owners, a corporation can be readily distributed to family members.
Keep in mind that the business structure you start out with may not meet your needs in years to come. Many sole proprietorships evolve into some other form of business-like a partnership or corporation-as the company grows and the needs of the owners change.
The bottom line? Don’t take this very important decision lightly, and don’t make a choice based on what somebody else has done. Carefully consider the unique needs of your business and its owners, and seek expert advice, before settling on a particular business format.
Sole Proprietorship
The simplest structure is the sole proprietorship, which usually involves just one individual who owns and operates the enterprise. If you intend to work alone, this may be the way to go.
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The tax aspects of a sole proprietorship are especially appealing because income and expenses from the business are included on your personal income tax return (Form 1040). Your profits and losses are first recorded on a tax form called Schedule C, which is filed along with your 1040. Then the “bottom-line amount” from Schedule C is transferred to your personal tax return. This aspect is especially attractive because business losses you suffer may offset income earned from other sources. As a sole proprietor, you must also file a Schedule SE with Form 1040. You use Schedule SE to calculate how much self-employment tax you owe.
In addition to paying annual self-employment taxes, you must also make quarterly estimated tax payments on your income. Currently, self-employed individuals with net earnings of $400 or more must make estimated tax payments to cover their tax liability. If your prior year’s adjusted gross income is less than $150,000, your estimated tax payments must be at least 90 percent of your current year’s tax liability or 100 percent of the prior year’s liability, whichever is less. The federal government permits you to pay estimated taxes in four equal amounts throughout the year on the 15th of April, June, September and January. With a sole proprietorship, your business earnings are taxed only once, unlike other business structures. Another big plus is that you have complete control of your business-you make all the decisions.
There are a few disadvantages to consider, however. Selecting the sole proprietorship business structure means you’re personally liable for your company’s liabilities. As a result, you’re placing your own assets at risk, and they could be seized to satisfy a business debt or legal claim filed against you.
Raising money for a sole proprietorship can also be difficult. In most cases, you’ll have to depend on your own financing sources, such as savings, home equity or family loans.
Partnership
If your business will be owned and operated by several individuals, you’ll want to take a look at structuring your business as a partnership. Partnerships come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership’s debts and other obligations. A limited partnership has both general and limited partners. The general partners own and operate the business and assume liability for the partnership, while the limited partners serve as investors only; they have no control over the company and are not subject to the same liabilities as the general partners.
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