Selecting The Legal Structure for Your Cleaning Business
One of the most important decisions you will make when starting
your cleaning business is deciding which type of legal structure
is right for your business. The type of entity you choose will
determine the amount of taxes you pay and guide you in the
amount of paperwork you will have to deal with. It will also
determine how much personal liability you have in the business,
and can be a factor in raising money or borrowing money for your
new business.
It is best to spend the time in the beginning to make sure that
the entity you choose is the one most suitable for your
particular circumstances. You can get advice on choosing your
legal entity from the local small business administration, your
accountant, and your attorney.
The different types of legal entities are:
*Sole Proprietor. This is the easiest type of business to form
and is one of the most common for small businesses. You have
complete control over your business and do not have to report to
anyone. The drawback to a sole proprietorship is that the owner
is personally liable for all financial obligations of the
business. This means that if your business is sued you can be
held personally responsible. Another drawback is that you are
responsible for the entire sum of FICA taxes due. Normally the
employer is responsible to match the employee's share, but when
you are a sole proprietor, you must pay the entire 15%.
*Partnership. This type of business involves two or more people
who agree to share in the profits and the losses of a business.
The profits or losses are passed on to each partner and it is
reported on their respective tax returns. Like a sole
proprietorship, partners are responsible for the financial
obligations of the business.
*Corporation. This is a legal entity in itself that is created
to conduct business. The corporation is separate from the
individuals that form the business and handle the
responsibilities of the organization. Just like a person, the
corporation can be taxed and it is also held legally responsible
for its actions. A key benefit of a corporation is that the
owner avoids the personal liability that occurs with a sole
proprietorship or partnership form of business.
*C Corporations are typically large companies and are publicly
held. If a C Corporation pays out dividends, then the profits
are double taxed. The C Corporation must file a return on its
own behalf and pays taxes on its profits before dividends are
paid to its shareholders. The shareholders must then claim the
dividends as income, which are taxed again.
*S Corporations elect a special tax status with the IRS and,
therefore, do not face double taxation. The corporation is not
treated as a separate entity; the profits are passed on to
shareholders just as if the business was a partnership or sole
proprietorship. The corporation itself does not pay taxes.
However, there are strict requirements that an S Corporation
must follow. Each stockholder of the S Corporation must be a US
citizen and there is a limit to the number of stockholders an S
Corporation can have. S Corporations can be appropriate for
small business owners who want the legal protection of a
corporation, but want the tax benefits of a partnership or a
sole proprietorship.
*Limited Liability Corporation. This is a hybrid type of
partnership. It allows owners to take advantage of the benefits
of a corporation and a partnership form of business. Like a
partnership, profits and/or losses are passed through to owners
and like a corporation, owners are shielded from personal
liability.
How do you know what business structure will work for your
cleaning business? There are several factors to take into
consideration when determining your business structure.
1. Legal liability. With a sole proprietorship or partnership
you can be held personal responsible for the business, which
means your personal assets can be taken if the business is sued.
2. Taxes. There can be a big cost savings in choosing one type
of business structure over another. C-Corporations are "double
taxed". The business profits are taxed and the money that is
passed on to you as the owner is taxed again.
3. Management and flexibility. Do you want to have total control
over the business? In a partnership or corporation there are
agreements and bi-laws that you have to abide by.
4. Cost of formation and administration. Sole proprietorships
are the easiest type of business to set up and maintain. There
are very few legal forms or tax requirements other than just
general good recordkeeping. A partnership needs to have a
partnership agreement drawn up ahead of time. Both corporations
and limited liability corporations need to have legal documents
prepared before the business begins operation.
5. Future needs. Where do you anticipate the business being in 3
years or 5 years? If something happens to the owner, what
happens to the business?
Your cleaning business can be successful with hard work and
dedication. Choosing the appropriate business structure can make
your task as a business owner much easier if you research your
options before signing up your first client. Discuss the various
business entity options with a professional before making your
final decision.