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