Anyone can start a business. One day you’re making candles in your kitchen, and the next you’re selling them for a profit. Boom, you’re in business. Registering or incorporating your new business with the state or government isn’t required to continue selling candles, but there are a few financial benefits that come with making your business more official.
Before we dive into those benefits, let’s take a look at your options.
The business structure you choose will dictate how you pay business taxes, how your personal assets are handled, and how your business will operate in the future. Your business structure also impacts how and where you register your business.
The most common business structures are:
1. Sole proprietorship
According to the IRS, “a sole proprietor is someone who owns an unincorporated business by himself or herself.” Sole proprietorships don’t require any sort of formal registration with the state or government—this status comes automatically when business activities are performed (like selling candles). In sole proprietorships, the business is not taxed separately from personal income.
A partnership is a business with two or more owners. In a general partnership, the owners all participate in the day-to-day operations of the business. They divide all profits and liabilities equally.
In a limited partnership, some partners participate in business operations and retain liability for business decisions, while limited partners don’t participate and don’t have liability. Limited partners are invested in the business but do not make operational decisions.
Finally, a limited liability partnership protects all partners from liability for the actions or debts of other partners within the partnership. However, partners are still personally liable for their own negligence. This status is most often used by professionals like doctors or accountants who go into practice together.
In any case, a partnership (like a sole proprietorship) is not a separate entity from the individual owners. Each partner pays income tax on their personal tax return.
3. Limited liability company (LLC)
An LLC combines the simplicity of a partnership with the limited liability protection of a corporation. LLCs may have one or many owners, referred to as “members.” Members can report profits and losses on their personal tax returns, or they can elect to have the LLC taxed like a corporation.
Due to the corporation status, an LLC protects its members from personal liability for business debts. But LLCs are typically easier to set up than a corporation. The requirements for LLCs vary by state, but a formal LLC requires articles of organization to be filed with the state along with a fee paid directly to the state.
4. C corporation
C corporations are typically reserved for medium to large businesses with multiple shareholders. A C corporation is recognized as a separate taxpaying entity. The corporation’s income is reported on its own tax return, while owners and shareholders are taxed separately.
Shareholders typically hold stock in the company and are required to follow formal company procedures, like electing a board of directors. There is no limit on the number of shareholders who can hold ownership in a C corporation, including other businesses and entities. These shareholders enjoy the full liability protections of a corporation.
5. S corporation
Like C corporations, S corporations receive liability protection from the corporation status. However, unlike C corporations, S corporations can’t exceed more than 100 shareholders, and ownership is restricted to individuals. S corporations are also exempt from general corporate income tax—they are taxed more like a partnership, income passes through the S corporation to the shareholders’ personal tax returns. Because of this, S corporations often get more scrutiny from the IRS.
Choosing the right structure
Choosing a structure isn’t cut and dry—each structure has its own list of pros and cons for business owners. Corporations enjoy more liability protections while partners and sole proprietors get more control and flexibility than a corporate structure allows. To further complicate matters, some designations (like S corporations) can be interpreted as a tax status and combined with other business structures.
It’s always a good idea to consult with a business counselor or accountant when making important decisions for your business, like choosing a business structure. You can always convert to a different business structure in the future, but it may cause unnecessary complications or add additional costs.
Financial benefits of registering your business
Choosing a structure and registering your business might sound like a lot if you were just hoping to pour candles in your kitchen and make a little extra money on the side. But registering your business is both easily said and done, and there are some serious benefits to officially registering your business with the IRS and state and local agencies.
Open a business bank account
Most banks require proof of registration to open a business bank account either in the form of a business license or an employer identification number. A business bank account allows you to keep your personal and business finances separate, which helps you protect your personal assets (even as a sole proprietor). A separate business bank account can also help you maximize your deductions come tax time and streamline the tax filing process.
Likewise, if you decide to apply for a small business loan or business credit card, lenders, investors, and bankers will ask to see your business registration. They want to know you’re a legitimate business before investing. Plus, some lenders or creditors offer special deals or discounts to officially registered businesses.
Attract more customers
In the eyes of your customers, a registered business is a credible business. Registering your business with local agencies, like the Better Business Bureau, makes your business appear legitimate. Customers will be more comfortable spending money in your registered business.
Even if you’re not quite ready to hire employees, you might want to in the future. Registering your business means you’ll be able to hire employees and pay them in accordance with state laws. When you register your business with the IRS, you’ll get an employer identification number which you need to set up payroll, pay taxes, and pay your team.
Protect your business name
Business names can only be registered with the state once. If you register your business name with the state, another business (say, a competitor) cannot register the same business name. Plus, when you register your business name, it has greater longevity. The registered business name can be taken over or sold if need be—so your business can continue on, even if you don’t continue on with it.
Registering vs. incorporating
Registering your business and incorporating your business are both ways to make your business legal—but with a few important differences.
You can register your business at your local government office to obtain a business license. In most cases, it can be done in just a few minutes online. You will likely need to renew your business registration each year—because of this, registration costs tend to be pretty affordable.
Incorporating your business establishes your business as a separate legal entity—a corporation. C corporations and S corporations are incorporated. LLCs can be incorporated, but not always. Incorporating your business involves filing a Certificate of Corporation, paying a state fee, and applying for an employer identification number. In general, it takes more time, effort, and money to incorporate a business.
Financial benefits of incorporating your business
Incorporating your business may come with extra work and a higher price tag, but it opens the door to even more financial benefits than business registration alone.
Protect your personal assets
An incorporated business is a separate legal entity, which means you won’t be held liable for its debts. If your business falls on hard times, your car, home, and other personal assets aren’t on the line. Likewise, if someone were to file a lawsuit against your business, you won’t be personally liable for damages.
Pay fewer taxes
There are a number of tax deductions available to small business owners—and even more available to incorporated businesses. Incorporated businesses can deduct employee benefits, deduct startup and operational costs, and spread any tax losses out over time. Plus, you’ll only have to pay Social Security taxes on the income you personally receive.
Get (more) funding
Incorporated businesses tend to have an easier time raising capital or applying for business loans. And because an incorporated business is a separate legal entity, a separate credit rating is given no matter what your personal credit score looks like.
Expense management for every business structure
If you get to the end of this article and decide to do nothing (we hope you don’t do this), you’re still a sole proprietor by default, and you’ll still pay taxes on your business. You’ll still make sales and order supplies and track expenses.
Tracking and categorizing business expenses for tax purposes is easier when you use QuickBooks Online. QuickBooks syncs with your accounts to automatically track and categorize income and expenses. And when you shop using your Amazon Business account, the Amazon Business Purchases app for QuickBooks is the smart and simple way to review and organize transactions.
This app only works with Amazon Business accounts. Sign up for a free Amazon Business account account to access a wide selection of products and tools for your business.
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