Starting a new business can be a bit overwhelming at times. One of the first decisions a business owner should make is the type of business entity they want to start. This decision must be made before you can register your new business in the State of Maryland. In this article, we will break down the types of businesses there are to consider, and some pros and cons of each type.
In a Sole Proprietorship, there is no separation between your business liabilities and assets and your personal ones. You file for a trade name with the state, and you are set up. Now, if you are going to have employees, you will also need to apply for an EIN (Employer Identification Number) from the IRS. If you plan on working as a “solopreneur”, you don’t actually need the EIN. Sole proprietorships are the easiest business entity to form, and you retain control of all aspects of the business. If your business is a high-liability concern, consider choosing another type of business entity, so you don’t put your personal assets at risk.
The most popular partnerships are Limited Liability Partnerships. In this type of partnership, each partner has limited liability. This means the partners don’t have to be worried about being held accountable for the partnership’s debts. They also don’t have to worry about being liable for things that the other partners do. This is the safest kind of partnership, because you don’t have personal responsibility for debts and misdeeds.
A Limited Partnership has one partner who does have unlimited liability, and other partners with limited liability. This makes sense if you have a primary partner who wants to maintain control over the company. The other partners will have less control in the business, and less liability for indebtedness.
In both of these partnership types, income is shown and taxes paid through the partners’ personal tax return.
LLC (Limited Liability Company)
Many business owners opt for the LLC, or Limited Liability Company business option these days. Assets are protected, liability is limited, and corporate taxes don’t apply. The only drawback to this type of entity is owners or partners in an LLC must pay self-employment taxes. This means they are liable for Social Security and Medicare taxes. If there are sizeable assets at stake, it makes sense to form an LLC and reduce liability. Keep in mind in the state of Maryland, forming an LLC means being responsible for filing a personal property return, and paying the $300 filing fee.
Typically, when you move into the realm of corporations, you will pay corporate tax rates on profits, and then again when the income is reported on your tax return… The S Corporation… or S Corp, as it’s commonly known, is very popular, because it allows you to report earnings through your personal income tax form. Keep in mind this special filing allowance is for Federal income tax. Some states don’t recognize the S Corp, so it may not be the best option, depending where you live.
In order to raise money for your business by selling stock in it, you must be a C Corporation, or C Corp. C Corps have their profits taxed twice… the corporation pays taxes on its profits, and then the dividends get taxed when the shareholders file their personal tax return. This is the most secure type of entity when it comes to protecting your personal assets. But, can be much costlier to organize and run.
There are other types of corporations, but this gives you an overview of the two main types of corporations that people usually opt for when starting a business.
If you’re unsure of the best option for you when you are setting up your business, contact us for help. This article provides a basic overview of several types of business structures. At JStevens Accounting, we can review all the pros and cons of the different types of business entities, and help you choose what works best for your circumstances. We understand all the tax and record keeping implications associated with each business type, and can give professional advice in all aspects of getting your business started.