So You Want to Start Your Own Business?
If the time has come to strike out on your own you must, of course, begin with a plan for the operation of your new business.
Preliminary considerations include where you will operate the business from (your home, rental space, purchasing or building, whether or not you will need to hire employees at the outset or wait until after the business develops, how you will finance the start-up costs and continued operation of the business, and whether or not you will be solo or if you will have a coowner or co-owners.
It is of critical importance that you have sufficient cash or financing available from the outset, since one of the primary reasons for new businesses to fail is undercapitalization. A well prepared business plan to be reviewed with your financing source is essential. Once all of these preliminary considerations have been addressed, a decision must be made as to the form of business entity that your new business entity will adopt. There are several options and choices that must be considered.
- Sole Proprietorship
Perhaps the most basic form is a sole proprietorship, which is a business that is owned by a single person. The main advantages of a sole proprietorship are that the start-up filing fees are minimal and all of the business income is reported on Schedule C of your own personal income tax return, with no separate income tax return required for the business itself. The main disadvantage is that you will be personally liable for all of the debts of the business.
Yet another entity choice is a partnership. For purposes of this article, discussion is limited to general partnerships only, since limited partnerships are beyond the scope of this article. Some of the main benefits of a general partnership are lower start-up costs and no double taxation of income at both the partnership level and at the individual partners’ level. Income and loss from the partnership flows through to the partners and is reported on their individual income tax returns. A main disadvantage is that each partner is personally liable for all partnership debts, not just those that he or she may have contracted for on behalf of the partnership.
- Limited Liability Company
Another available option, which has become extremely popular in recent years, is the limitedliability company, or LLC. It seems that there are dozens of new LLCs being constantly formed, as evidenced by all of the notices of formation found in the legal advertising section of practically every newspaper. Main advantages of this type of entity include no personal liability of the members for the debts of the business (unless personally guaranteed) and no double taxation of income at both the entity level and on the members’ level (normally an election is made to be taxed as a general partnership). Disadvantages of an LLC include higher start-up costs (filing fees and publication fees) and annual New York State fees which are a minimum of $325.00.
The last choice of entity option ordinarily considered is a corporation. If this option is selected, it must also be decided early on as to whether or not to be treated as an S corporation, which also has the advantage of no double taxation of income at both the entity level and on the shareholders’ level. If an S election is not made, the corporation will be taxed as a C corporation, wherein the corporation itself pays income tax on its income and shareholders pay their own personal income tax on their salary and on any dividends paid to them by the corporation. Another advantage of a corporation is that the shareholders are not personally liable for the debts of the corporation unless they have personally guaranteed them. Disadvantages of a corporation as the entity choice are higher start-up costs, such as filing fees and fees for the corporate minute book, etc.
Anyone who is entertaining the thought of starting his or her own business must carefully plan and consider his or her decisions before striking out on their own. It is of critical importance to consult with lenders and other financial advisors, accountants and, of course, an attorney who is familiar with this area of practice, in order to give your new business the greatest chance of surviving and thriving.