How to Choose the Best Business Structure for a Cleaning Business
One of the most important decisions you will make when starting your cleaning business is deciding which type of legal structure is right for your business. The type of entity you choose will determine the amount of taxes you pay and guide you in the amount of paperwork you will have to deal with. It will also determine how much personal liability you have in the business, and can be a factor in funding money for your new business.
It is best to spend the time in the beginning to make sure that the entity you choose is the one most suitable for your particular circumstances. You can get advice on choosing your legal entity from the local small business administration, your accountant, and your attorney.
The different types of legal entities are:
Sole Proprietor
This is the easiest type of business to form and is one of the most common for small cleaning businesses. You have complete control over your business and do not have to report to anyone. You are automatically considered a sole proprietorship if you do business activities but do not register as any other kind of business.
Sole proprietorships are a suitable choice for low-risk businesses and cleaning company owners who want to first test their business idea before forming a more formal business. The drawback to a sole proprietorship is that the owner is personally liable for all financial obligations of the business. This means that if your business is sued, you can be held personally responsible. Another drawback is that you are responsible for the entire sum of FICA taxes due.
Partnership
This type of business involves two or more people who agree to share in the profits and the losses of a business. The profits or losses are passed on to each partner and it is reported on their respective tax returns. Like a sole proprietorship, partners are responsible for the financial obligations of the business.
Be cautious before getting into a partnership because each partner is liable for each other's actions. If there is any legal action taken, each partner's personal property will be at risk. In addition, if your partner skips town you could be left holding the bag. You should use an attorney to set up a partnership and each partner should have his or her own attorney. This should cost about the same or a little less, to set up a partnership as it would to set up a corporation.
Corporation
This is a legal entity in itself that is created to conduct business. The corporation is separate from the individuals that form the business and handle the responsibilities of the organization. Just like a person, the corporation can be taxed and it is held legally responsible for its actions. A key benefit of a corporation is that the owner avoids the personal liability that occurs with a sole proprietorship or partnership form of business.
There are three types of corporations, so you will want to consult with an attorney to get set up legally. There are online websites that will allow you to set up your corporation yourself but if you have any doubts or questions, contact a business attorney. It is probably going to cost you a few hundred dollars, upwards to a thousand dollars, to set up a corporation.
C Corporations are typically large companies and are publicly held. If a C Corporation pays out dividends, then the profits are double taxed. The C Corporation must file a return on its own behalf and pays taxes on its profits before dividends are paid to its shareholders. The shareholders must then claim the dividends as income, which are taxed again.
S Corporations elect a special tax status with the IRS and, therefore, do not face double taxation. The corporation is not treated as a separate entity; the profits are passed on to shareholders just as if the business was a partnership or sole proprietorship. The corporation itself does not pay taxes.
However, there are strict requirements that an S Corporation must follow. Each stockholder of the S Corporation must be a US citizen and there is a limit to the number of stockholders an S Corporation can have. S Corporations can be appropriate for small business owners who want the legal protection of a corporation, but want the tax benefits of a partnership or a sole proprietorship.
Limited Liability Corporation
This is a hybrid type of partnership. LLCs can have one or more members (owners, partners, shareholders, etc.) and it allows them to take advantage of the benefits of a corporation and a partnership form of business.
Like a partnership, profits and/or losses are passed through to the members and like a corporation, they are shielded from personal liability. LLCs have to be registered with the state and requires a filling fee, determined by the state you register in. LLCs also come with bigger tax burdens, requiring you to pay federal, state, and local taxes, with some states requiring unemployment and business tax obligations.
What factors that could impact your choice for the best business structure for your cleaning business? How do you know what business structure will work for your cleaning business?
There are several factors to take into consideration when determining your business structure.
Legal Liability
The number one consideration when selecting a business structure for your cleaning business will be how it protects your personal assets and reduce exposure to liabilities. With a sole proprietorship or partnership, for example, you can be held personally responsible for the business liabilities, which mean your personal assets, can be taken if the business is sued.
Tax Considerations
There can be a big cost savings in choosing one type of business structure over another. C-Corporations are "double taxed". The business profits are taxed and the money that is passed on to you, as the owner, is taxed again. Choosing the right structure for you cleaning business can maximize your tax benefits, avoid double taxation, lower your tax rates, and ensure that the business can be financed and run efficiently.
Management and Flexibility
A major consideration will be how many owners your cleaning business will have and how involved the owner(s) will be in business decisions and management. Do you want to have total control over the business? Then perhaps you want to look at a sole proprietorship. In a partnership or corporation, which normally has more than one partner, there are agreements and bi-laws that you have to abide by.
Cost of Formation and Administration
Sole proprietorships are the easiest type of business to set up and maintain. There are very few legal forms or tax requirements other than just general good recordkeeping. A partnership needs to have a partnership agreement drawn up ahead of time. Both corporations and limited liability corporations need to have legal documents prepared before the business begins operation.
Future Needs
Where do you anticipate the business being in 3 years or 5 years? If something happens to the owner, what happens to the business? What will happen if you decide to sell your cleaning business in the future? As your business grows and evolves, you can expect changes and those changes may affect your initial business plan. These changes may make it necessary for you to change your entity type.
Conclusion
Your cleaning business can be successful with hard work and dedication. Choosing the appropriate business structure can make your task as a business owner much easier if you research your options before signing up your first cleaning customer. The structure you choose will depend on your current business model, if you will have multiple owners, your financial situation, and current needs. Discuss the various business entity structures with a professional before making your final decision.
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