What Business Entity Should I Start?

Before we determine which business entity to form, the better first question is actually, "Should I incorporate?" The simple answer here is yes. Whether you are a home center or a commercial center, you should NOT operate your business as a sole proprietor or partnership. Here is why, limited liability protection. We work with children and even in the safest environments there is always the possibility that tragic things happen. If a parent were to sue you they may have access to all of your assets, this includes home and cash. Well, the first line of defense from this is forming a business entity.; the second is obtaining a liability insurance policy and maybe even an umbrella policy.

Limited liability protection doesn't just mean protecting your assets from potential suit, it also means potentially protecting you from personally paying back the debt your business creates. Lets face it, we live in shaky economic times and as a day care owner we face uncertainties all of the time. We don't plan to fail, in fact we are doing pretty well, but it's good knowing that we have limited liability to our school's debt. There are many other reasons why you should decide to place your business into a business entity; the ones I have given are the primary reasons we decided to do so.

All right, I know what you're thinking. What business entity do I form? Well, you have several choices. You can set up an LLC, which is a Limited Liability Company, an S- Corporation, or a C-Corporation. All of these entities provide limited liability. They have some similarities but have very distinct difference. I will go over all of them and you and your tax advisor can decide which is best.

LLC

Many small businesses choose to be an LLC. This business entity is an alternative business type to corporations. It provides accounting flexibility, allowing you to use cash or accrual based accounting. It allows for multiple partners but still provides limited liability protection. Liability is limited to the amount each individual has invested in the LLC. Finally, this business entity allows pass-through taxation for a single owner or partners. Pass-through taxation means that the LLC's income or loss is passed through to the owner or partner's individual return. LLC's allow for flexibility in management and rules are not as strict about record keeping. For example, they are not required to have annual meetings and keep annual meeting minutes, though it is good business practice to do so if you have multiple partners.

S-Corporation

An S-Corporation is a corporation that has elected a special tax status with the IRS. The S-Corp is also a pass-through business entity. Again, this means that the profit and loss of the corporation is passed through to the individual tax return. This means that the corporate income is not taxed and that what ever is left is treated as a dividend and taxed at the individual level. This type of taxation avoids the potential double taxation seen in C- Corporations. All corporations start out as C-Corporations with the state they incorporate in. IRS Form 2553 needs to be signed by all shareholders of the corporation in order to be designated an S-Corporation. Most importantly is that liability is limited to the amount the shareholder has invested in the company.

C-Corporation

A C-Corporation is a standard corporation. It is a business entity separate from its owners or shareholders. The C-Corporation's income is taxed at the corporate level. If the corporation distributes dividends, the dividends are taxed on the individual shareholder level. This provides for a "double taxation". This taxation can be reduced if planned properly. The losses are also not able to pass through to the individual and cannot offset other taxable income. C-Corporations are generally required to use accrual based accounting but they are allowed to set their own fiscal year (a year that doesn't begin on January 1 or end on December 31st). There are many benefits to having your business be a C-Corporation but many do not apply until your business is making a substantial income. Also, like the LLC and the S-Corp, the C-Corp allows for limited liability. Shareholders are only liable for the amount they have invested in the corporation.

Which one is best?

Now, I won't tell you which entity to form. Each individual situation is different. Each entity provides different benefits and they are each treated differently when it comes to taxes, It is best to speak to your tax advisor to help you choose. I will tell you that we chose to set up the S-Corp business type. We felt it was the best choice for us because we are able to use our corporate losses to offset other income, we will not be doubly taxed as in the C-corporation, we prefer to use the cash accrual method for accounting because it's easy to use for child care centers, and we enjoy the liability protection S- corps provide. For more DIFFERENCES BETWEEN A CORP AND LLC (INC LAW LIBRARY) Click Here.

How do we set it up?

There are many ways to set up your business type. Your accountant can set it up as can your attorney. If you are comfortable, you can do it on your own by contacting your state or the state you choose to set up your entity or you can use one of the many online incorporation companies, which is what we chose. We actually used Legal Zoom. We found that using an online service such as this was affordable and most are very informative.


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