Setting Up Your Business -- Sole Proprietors, LLCs and More
At this point, you’ve made a lot of decisions regarding your new business. You’ve chosen the right printer, software and computer and decided whether to work from your home or set up a storefront operation. You’ve probably already started identifying your potential customers and how to reach them. But before we go much farther in our discussion on setting up a funeral program business, it’s time to make one more important decision—determining your tax status.
Choosing Your Company’s Tax Status
You may be saying at this point, “Why do I even need to worry about this, don’t I pay taxes either way?” The overall answer is “Yes” but your tax status can have a big impact on your business. Knowing all the facts about how a sole proprietor pays taxes, and takes on risk for the business, versus what happens when you’re a limited liability corporation (LLC) will help you make the right decision. Here are the basics:
Setting up Business as a Sole Proprietor
This is the easiest possible way to get started in business, because there is no special paperwork other than local and state business licenses, if required. You simply start operating your business to be recognized as a sole proprietorship. When it comes to tax time, you will pay state and federal taxes just as any other individual, except that you’ll list your income and expenses on a Schedule SE form and then pay tax on the actual profit. Your business is considered unincorporated, and you are personally responsible for any debts or legal liabilities for the business.
Setting up Business as a Limited Liability Corporation
To protect their personal assets, and sometimes in order to obtain business loans, some people choose to set up shop as an LLC. This requires filing paperwork with your state to form this kind of corporation, so you’ll need to build that into your start-up money. You will also be required to file corporate reports with the state each year, and that usually involves some sort of fee. On the positive side, if you follow the rules of operating an LLC and keep your personal and business money completely separate, your liability for legal matters or debts is usually limited to the assets of the LLC. Another advantage is being able to bring investors into the LLC to share in the expenses and the profit of your business. Income for LLCs is reported as individual income for the owner and investors at tax time. Tip: consult a tax specialist or business attorney to make sure you understand the requirements for operating an LLC in your state.
There are a couple of other ways to set up your business, if more than one owner or shareholder will be involved. An S Corp is a special type of corporation that passes along the income, expense and taxes to its shareholders (except for employment related taxes). This is usually reserved for larger businesses.
A partnership, on the other hand, doesn’t require incorporation paperwork but can require working with an attorney to spell out how each partner will share in the income and expense of the business. Just as with a sole proprietorship, the partners of a business are personally liable for any debt or legal obligations.
Completely confused? It’s a lot to take in, but an important subject as you start your funeral program business. Most home-based businesses start as sole proprietorships because of the ease and affordability of this status. If you’re starting in a big way, with multiple partners or investors, though, it’s worth your while to look into these other forms of business.
Keep in mind, this article shouldn’t be considered legal or financial advice, as that’s the job of your tax specialist or attorney. (Another great source of information can be found at IRS.gov.) Armed with the information we’ve provided, you can begin your research on the best possible way to set up your funeral program business.