You may be operating a sole proprietorship business right now and not even know it. If you provide contract services, say as a proofreader for a legal office, you are a sole proprietorship. Likewise, you are one, if you make extra income as a photographer or as a do-it-yourself delivery driver. In some cases you may need to apply for licenses or permits. Say, you are operating the "Carrot Cake Bakeshop" in Downtown Brooklyn, NY. You can be a sole proprietor, pay bills from your own check book, but still need permits as a food handler, need a certain amount of certified training; you could even be fined for not cleaning the sidewalk in front of your shop, or for failing a cleanliness inspection of the Dep't of Health.
You need to look at the different forms of business ownership and see which best applies to you. For various reasons, certain types of small businesses need to either become a LLC (Limited Liability Company), or a Corporation. Corporations can also have the form of an "S" corporation, which is geared to a sole proprietor, or small groups in a small business.
An example where an LLC would be more or less imperative is if you are starting a real estate business, since you are holding property that will hopefully increase in value. You want to avoid getting taxed twice as a corporation, yet your personal assets are protected if your business goes bankrupt. Many real estate investors form an LLC to hold the property titles to their real estate in order to protect their personal assets. So if John Public owns three houses that he rents out, the leases can be in the name of the LLC. This has big benefits in the case of speculative real estate activity that may boom, but at high interest rates, could also rapidly go bust. For advice you can get
legal information for small businesses.
In various forms of businesses where there are risks of accidents, an alternative to forming an LLC and something that may be necessary in any case is business insurance. This can involve anything from the delivery man driving a car and delivering pizza, to the handling of hazard materials in a manufacturing business. You need insurance to protect yourself in case of car, or other accidents.
One of the main differences between forming a corporation and an LLC is the tax structure. For tax purposes, an LLC is basically a pass through entity, which though it has limited liability, you and any partner(s) must pay their share of taxes for profits. A corporation functions differently; it is a legal entity that pays its own taxes. This has some advantages, in that it can reduce your self-employment taxes. These are those pesky 15.3% taxes to pay all your Social Security, Medicare, etc. For an S corporation, you pay the self-employment tax on money you receive as compensation for services, but not on profits as a shareholder. So if your services as a bookkeeper are worth $50,000, you only pay self-employment taxes on this portion and you can receive say, another $50,000 in corporate dividends. This will involve some more complicated bookkeeping, to keep track of the corporation as an independent entity.
Howard Giske is a legal consultant for Inc. Paradise, where you can get
incorporation services.
