Do you already have a business plan that you would like to execute and the first thing on your list is to get a business license? Here are two critical things you should consider to help you prepare for filling out that business registration form.
1. Type of Business Entity - You have the following main choices:
Each type of entity has its pros and cons. In a nutshell, corporations and LLPs/LLCs exist as independent and separate entities from those considered "owners." From a legal standpoint, it provides you with more protection because should a lawsuit arise for any business-related reason, it prevents the other party from going after your personal assets. Sole proprietorships and partnerships, on the other hand, do not provide you or other owners with such protection, so you are personally responsible for all debts and liabilities incurred by the business.
When it comes to taxes, paperwork, and formal business requirements, sole proprietorships and partnerships enjoy the advantage over corporations and LLPs/LLCs. For many sole proprietors, they are usually only required to file a simple 1-2 page Schedule C tax form. Corporations, on the other hand, must usually file a more extensive 8+ page 1120 or 1120S form.
In addition to dealing with less paperwork, sole proprietors also get many tax benefits, such as being able to hire their minor children without being required to pay taxes on payroll. If a sole proprietor hires his/her spouse as an employee, the sole proprietor is also able to establish a healthcare reimbursement arrangement (HRA) that could potentially reimburse all or most of the family's medical costs. The sole proprietor can then claim the reimbursement as a business deduction for both income tax and self-employment tax, essentially providing huge savings through this double deduction.
When it comes to choosing your business entity, it basically becomes a consideration between tax benefits or liability risks. The information provided above is not meant to be a recommendation for any particular type of entity, so we do recommend that you consult a tax adviser if you're unsure about which type of business would benefit you the most.
2. DBA - "Doing Business As..."
Another thing to consider before registering your business is if you want to or are required to register a fictitious (or "assumed") business name.
The rules may vary from region to region, but generally, if your business name consists of either your full name or part of your name along with a brief description of your services, you may not be required to file a DBA. For example, if your name is John Doe and you provide construction services, you can conduct business under a name like John Doe Construction or J. Doe Construction. However, if you just use your first name or it appears as if there is more than one person involved in your business (such as John's Construction or Doe & Associates), then you are required to file a DBA. Filing a DBA is usually inexpensive and is a better cost-effective alternative to registering a corporation in order to legally do business under a business name.
Filing a DBA for corporations is beneficial in that it allows you to operate multiple businesses with different business names without registering each one as its own entity. For example, if you wish to open a chain of candy stores, you can register a corporation with a generic name (such as Candy Shops, LLC) and file a DBA for each store if you want them to have different store names. This is a huge money-saver since filing multiple corporate entities can get expensive.
So now, before you jump into filling out a business registration form, we hope we have provided you with some insight on two important details in the business registration process. Which is more important to you, tax benefits or limited liability? Are there other pros and cons you know of for filing different types of business entities?
Disclaimer: This post is not intended to constitute legal advice. We recommend that you consult with a legal or tax professional about business incorporation.
1. Type of Business Entity - You have the following main choices:
- Corporation
- Sole Proprietorship
- Partnership
- Limited Liability Partnership or Corporation (LLP or LLC)
Each type of entity has its pros and cons. In a nutshell, corporations and LLPs/LLCs exist as independent and separate entities from those considered "owners." From a legal standpoint, it provides you with more protection because should a lawsuit arise for any business-related reason, it prevents the other party from going after your personal assets. Sole proprietorships and partnerships, on the other hand, do not provide you or other owners with such protection, so you are personally responsible for all debts and liabilities incurred by the business.
When it comes to taxes, paperwork, and formal business requirements, sole proprietorships and partnerships enjoy the advantage over corporations and LLPs/LLCs. For many sole proprietors, they are usually only required to file a simple 1-2 page Schedule C tax form. Corporations, on the other hand, must usually file a more extensive 8+ page 1120 or 1120S form.
In addition to dealing with less paperwork, sole proprietors also get many tax benefits, such as being able to hire their minor children without being required to pay taxes on payroll. If a sole proprietor hires his/her spouse as an employee, the sole proprietor is also able to establish a healthcare reimbursement arrangement (HRA) that could potentially reimburse all or most of the family's medical costs. The sole proprietor can then claim the reimbursement as a business deduction for both income tax and self-employment tax, essentially providing huge savings through this double deduction.
When it comes to choosing your business entity, it basically becomes a consideration between tax benefits or liability risks. The information provided above is not meant to be a recommendation for any particular type of entity, so we do recommend that you consult a tax adviser if you're unsure about which type of business would benefit you the most.
2. DBA - "Doing Business As..."
Another thing to consider before registering your business is if you want to or are required to register a fictitious (or "assumed") business name.
The rules may vary from region to region, but generally, if your business name consists of either your full name or part of your name along with a brief description of your services, you may not be required to file a DBA. For example, if your name is John Doe and you provide construction services, you can conduct business under a name like John Doe Construction or J. Doe Construction. However, if you just use your first name or it appears as if there is more than one person involved in your business (such as John's Construction or Doe & Associates), then you are required to file a DBA. Filing a DBA is usually inexpensive and is a better cost-effective alternative to registering a corporation in order to legally do business under a business name.
Filing a DBA for corporations is beneficial in that it allows you to operate multiple businesses with different business names without registering each one as its own entity. For example, if you wish to open a chain of candy stores, you can register a corporation with a generic name (such as Candy Shops, LLC) and file a DBA for each store if you want them to have different store names. This is a huge money-saver since filing multiple corporate entities can get expensive.
So now, before you jump into filling out a business registration form, we hope we have provided you with some insight on two important details in the business registration process. Which is more important to you, tax benefits or limited liability? Are there other pros and cons you know of for filing different types of business entities?
Disclaimer: This post is not intended to constitute legal advice. We recommend that you consult with a legal or tax professional about business incorporation.
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