You and your young family are doing well. You have no debt, your finances are in order, and you want to leave the corporate world to be your own boss. With an idea you’ve had rumbling in your head for years, you’ve decided to start your own business and build it to the point you can leave your current position. Good for you, and you’re not alone. According to an article in Forbes magazine, almost two million workers are leaving their corporate jobs each month to start their own businesses.
The good news is there are plenty of tools and books out there that can help you start and maintain a successful business. The not so good news is you need to take some time to figure out what type of business you will be. Will you establish yourself as a non-profit, a sole proprietorship, or some form of corporation. What you choose determines the needed paperwork, what taxes to pay, if any, and how frequently you need to pay them. Below is a brief explanation of some of the more common forms of business identifications.
Nonprofit – Known as a 501(c), nonprofits are businesses designed for an artistic, civic, or charitable purpose. Money earned in these organizations goes back into the business in the form of salaries and infrastructure or out into the world as donations or grants. Most nonprofits are exempt from paying federal or state taxes but still have to report their activities to the government.
Sole Proprietor – This type of business is unincorporated or considered an independent contractor. It may be a side business where you make some extra money on your own but not enough to be set up as a LLC or corporation — more on those below. Revenue for this type of business is recorded on Schedule C of your annual taxes. However, if you business makes a sizable amount of profit each month, you may need to file quarterly estimated taxes to comply with federal and state guidelines. Consult with the IRS website or your tax accountant for more information.
LLC – A Limited Liability Company, or LLC, has elements of corporate and sole proprietor structures. Used for both profit and non-profit businesses, an LLC can be established by an individual or a group and has limited liability, meaning someone can sue the LLC rather than the owner. Sole owners of LLC can report their business income via Schedule C on their federal taxes or, should their quarterly income be a certain amount, estimated taxes. LLCs with multiple individuals need to fill out IRS form 1065 as well as prepare estimated taxes.
Corporation – The two most common types are S- and C-corporations, which are both considered for profit operations. A major difference between a corporation and a LLC are shareholders. Both S- and C-corporations must have at least one shareholder, with the S- version having no more than 100 of them. Both corporations have limited liability when it comes to lawsuits and have full discretion on the way their profits are distributed. Corporations must complete quarterly estimated taxes on a regular basis or face fines and possible audits by tax authorities.