So you quit your job! What kind of company should you start?

There are literally thousands of things to consider when running your own company. Today we will focus on business entity types. Note each state may differ, but as a general guideline this article will serve.

Entity types. The main entity types are: sole proprietorship, limited liability (inclusive of partnerships and corporations), S-corporations, C-corporations and 501-3C (non profits). Each have their own strengths and weaknesses Fortunately the IRS and most states make it easy to move up the ladder as your company grows.

Sole proprietorship. This the historic "mom'n'pop shop". Designed for a single owner, it's best for a company that only does one thing and has limited suppliers and customers, or is a cash-based transactional business, like a small storefront. Pros: cheapest to set up, easiest to run (often can be run in Quicken, total revenue is added to personal income tax, minimal tax paperwork. Cons: more difficult to isolate business only expenses, can get difficult to track paperwork when you exceed $100,000 in revenue. and adding employees is a pain. Worse - an unhappy vendor or customer can sure your personal property if the company isn't big enough.

Limited liability. As the name implies, it limits your personal liability in a lawsuit. By far the most common entity, it is ideal for businesses with no more that a handful of owners. It allows for ownership to be split up unevenly between partners and it can be changed with a simple resolution signed by all members. It tracks revenue and expenses both as an entity and per owner for income tax sake. Cons: some income and revenue get split between owners, even if that owner didn't contribute evenly to the success of the company. It requires both a corporates tax return and is added to your personal tax return as income. Not recommended if the per owner profit exceeds $200,000 due to tax liabilities.

S-Corporation. If you want to grow or franchise to multiple locations, offer stock ownership to non-owners, or have facilities in multiple states, this is a popular option. With a S-corporation, ALL revenue and expenses are run through the company (no more personal expenses) and taxes are filed independent of your personal tax return. Each owner must take a salary (at least minimum wage) which goes on his/her personal tax return. If the company is sued, all litigation only affects the corporation, not the individuals' (unless there is criminal wrongdoing). S-Corporations can more easily establish corporate credit, purchase larger assets,

C-Corporation. This is when you hit the big time. Stricter rules for tracking expenses and revenue also yield to more loopholes. There's a reason why Amazon, Facebook and Apple pay less taxes on a hundred billion dollars that you do on $100,000. Designed for highly profitable companies, one of the big things is you can differentiate the value of private versus public stock. Private (founder's) stock can be valued at a higher per share value than that offered to the public, employees. Spinning off divisions can be valued differently as well. If you go international, C-corporations offer benefits that extend to other countries and banking systems as well.

501-3C Non-profit. If you start a church, foundation or charity, this the way to go. While the entity cannot have a profit, it "breaks even" every year. It can use proceeds to buy other entities and assets, as long as they can be proven to align to the publicly state goals of the organization. Employee salaries and other expenses work the same way. An annual tax return is necessary to disclose where the money went, but no corporate income tax is usually paid. Very strict guidelines, that if not followed, can enable a state to pull the 501-3C designation away, thereby making it a normal S-corporation.

Want to learn more about the best option for you? Send me a message.