Let’s talk about business structure. A lot of people try to keep their business “under the radar” of the government. Most people who do so do it with the best of intentions at heart. However, some decisions, like not taking the time to get required licenses or choosing not to file your taxes, are huge business mistakes.

When you try to hide your business from the government, you won’t be able to grow your business very much. You’ll be making decisions that will keep you “secret” from the authorities, but, in doing so, it will also keep your business very small. If you want to be profitable and grow, you must operate aboveboard.

First, choose a business structure that meets the unique needs of your business. Then, as you do business, be open, honest, and pay your taxes. Nobody likes taxes, but it’s part and parcel of being a business owner. Trust me, if you try to fight the IRS, the IRS will always win. So you might as well obey the laws of the land, and do it right the first time. After all, the Bible does instruct believers in this way: Give back to Caesar what is Caesar’s and to God what is God’s. (Matthew 22:21)

Today we’re going to take a brief look at business structure options. Different states have different laws, so be sure to check with a business attorney once you have an idea about how you’d like to proceed.

Sole Proprietorship

The simplest form of doing business is the sole proprietorship. This is a fancy way of saying you’re in business by yourself, for yourself. It takes very little to start a sole proprietorship. Decide on a Monday that you want to open a business, and on Tuesday you are in business. You file your taxes in your own name, usually with your Social Security number. You’ll pay quarterly or yearly, depending on state regulations and your personal financial situation. You alone hold decision-making power as the owner and operator of your business, and you’re the one responsible for accurately filing taxes.

While it may be the simplest way of operating, it can also be the most risky business structure. Sole proprietorships are subject to unlimited liability. This means you are 100% liable for all of your debts. Those debts can extend from your business into your personal life, including your house and car. If you make a few critical mistakes, you could end up being sued and losing your own home for something related to your business.

Partnerships

A partnership is a business structure in which two or more individuals open and operate a for-profit business together as co-owners. Legally, the business is regarded as a group of individuals working together. However, each partner in this business structure must file their share of the profits on their individual tax returns.

Partnerships enjoy nice perks like having shared start-up costs and shared responsibility of work. But be careful. Sometimes partnerships can go bad quickly if all partners are not unified in the vision and direction of the business. Partnerships are often started out of a mutual passion; that passion can fade when the hard work sets in. Just make sure all parties involved are of like mind as far as the business is concerned.

There are several types of business partnerships: limited partnership, general partnership, joint venture, and strategic alliance. If you think a partnership is the way you want to structure your business, take some time to research exactly which model will fit your needs best.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a business structure similar to a corporation, but on a smaller scale. LLCs are popular with small business owners because in an LLC, you have limited personal liability for the debts and actions of the business. This means personal assets like your home and car are shielded from any bad business debt or potential legal action. Another perk LLCs enjoy: the bottom-line profit of the business is not considered to be earned income to the members, and therefore is not subject to self-employment tax as it is in a sole proprietorship.

Owners of an LLC are called members. Members may include individuals, corporations, even other LLCs. There is no maximum number of members, and some LLCs are operated by a single individual. The definition and operating rules of an LLC can differ slightly from state to state, so it’s important to check your state’s requirements.

Here’s an interesting fact: Each year, the IRS audits 1 out of 3 sole proprietorships. That’s a whopping thirty-three percent. An LLC is audited only 1 out of 100 times – that’s just one percent! Can you see why the LLC is such a popular business structure?

S Corporation or S-corp

An S corporation is a corporation that makes a legal election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.

This means S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. We call this single taxation.

The S-corp option is primarily used for larger businesses and isn’t usually the first consideration for an off-the-grid business.  Maybe one day, but you’re probably not there yet.

C Corporation or C-corp

A C corporation is a corporation that is legally taxed under Subchapter C of Chapter 1 of the Internal Revenue Code. Most major companies are treated as C corporations for federal income tax purposes. A C Corporation is probably not relevant to your small business, as it is usually reserved for the giant corporations.

Important note: This information should not be construed as legal or tax advice. Always consult a qualified attorney, tax professional, or business consultant regarding your particular situation.

Next time: Tips on outsourcing accounting and tax work.

1 Comment

  • Avatar
    Shalini Posted October 6, 2012 11:39 pm

    , the film’s thesis (as I urtsnedand it) is pretty dead-on. I have worked in corporations large and small, including some of the world’s most powerful ones, and at an executive level from which I was afforded a view beyond the cubes and right into the Board room and the CEO’s office. And corporations are no different than bake sales, bowling leagues, or church congregations in that they are made up of just plain folks at all levels (yes, even at the executive level) at about the same frequency you’d find in any other assemblage of human beings: a few are very, very good, a few are very, very bad, and the great majority are neither, but are instead just regular folks, a little good, a little bad, mostly neither and just trying to get along/go along.But take that standard distribution of human nature and stir it up in the corporate rendering pot and here I’m talking corporations where big money is in play and the result is almost always pathological. The bad actors will generally rise to the top the sociopaths, the compulsive liars, the @ss-kissers, the amoral. This is so because short-term success is the only thing that is rewarded by shareholders, and thus by the CEO, and thus by the execs, and thus by the managers . And the quickest, surest route to short-term success, throughout all of human history, is to be the biggest SOB on the block. Let’s face it: it works. In rare instances you can advance by being smarter, more creative, more insightful than everybody else (I like to think that’s how I rose through the ranks, anyway), but there is a distinct glass ceiling to that aapproach. Really smart, really constructive guys are really not welcome at the top, whaich is the SOBs’ Club.As a necessary consequence, the organization as a whole takes on an amoral character with a thin moral veneer just enough to keep us out of the paper, not enough to be an inconvenience. In that environment, good people swallow theirmorals every day, because getting fired is scary it is a Little Death for most folks. You have kids to feed, a mortgage to pay; you can’t afford to rock the boat. You’ve signed a bargain with the devil. Only very infrequently do people actually say take this job and shove it . Mostly they keep their heads down and their mouths shut the attitude which has enabled every evil the world has ever known.So, yeah, overall I’d have to agree. It really makes very little (if any) difference how good a person you are. Once you’ve bought into the systemyour soul pretty much belongs to the system, and it ain’t pretty.As for me, earlier this year I finally said I ain’t gonna work on Maggie’s farm no more. And I couldn’t be happier. Re-discovering my moral self is really exciting, and heartening.ub.

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