Contractor's School - Business Organization, Contractor Business Set Up

Business Organization
As part of the application process, all applicants must set up a business that is registered with the Division of Commerce and Corporations. Sole proprietorships, partnerships, corporations and limited liability companies are the most common ways businesses are organized.

Contractor's School, Inc. will assist you in organizing your business and registering with the appropriate state and federal agencies. We want you to make educated decisions when deciding on a business structure. The followin paragraphs provide brief descriptions of each business entity and the andvantages and disadvantages of each.

	Formation	Liability	Control	Taxation	Transferability
Sole Proprietorship	Register doing business as name with State - low start up costs.	Owner personally responsible for all debts.	One Boss - Easy to manage.	Self-employment taxes. Personal income tax rates.	Owner dies, quits or sells the business it is terminated.
C-Corporation	Register Articles of incorporation with State	Personal assets protected if corporation is run correctly.	Shareholders, Board of Directors, Corp. Officers	Double Taxes on wages and dividends.	Shares can be transferred or corporation can be dissolved.
Subchapter S Corporation	Register Articles of Incorporation with State	Personal assets protected if corporation is run correctly.	Shareholders, Board of Directors, Corp. Officesr (usually owner is all of the above.)	Personal income tax rates for dividends. Profits/Losses are passed through to owners.	Shares can be transferred or corporation can be dissolved.
General Partnership	Register doing business as name with State - partnership agreement.	Partners personally liable for all debts, including each others in business.	Two Owners - equal control. Easy to manage.	Self-employment taxes. Personal income tax rates.	Partner dies, quits or resigns the partnership is terminated.
Limited Liability Company	Register Articles of Organization with State.	Personal assets protected if company is run correctly.	Managing Member or Members.	Self-employment taxes. Personal income tax rates.	Units can be transferred or LLC can be dissolved.

Choosing a Business Entity
In choosing a business entity, there are many factors that should be considered in deciding on what type of entity to use for your organization:

Cost
Personal Liability
Tax Rates
Ease of Transferability
Amount of Paperwork

Sole Proprietorship
A sole proprietorship is a business owned, operated and managed by a single individual. When an individual forms a sole proprietorship, that person runs the risk of having all of his/her personal assets exposed to creditors in business. For example, if an employee accidentally or carelessly injures a customer or some other person, the owner of the business is liable for the injury. Even if there is public liability insurance coverage, the possibility always exists that the liability may exceed the coverage of the insurance policy – particularly in a society such as ours where mulit-million dollar judgements are becoming more and more common.

All profits and debts belong to the owner and are to be reported on the owner's personal tax returns. Also as a sole proprietorship the owner is required to pay self-employment tax at the rate of approximately 15% , in addition to the required federal and state tax.

Although this form of business entity has many drawbacks it is the easiest to operate, the easiest to set up and the least expensive to form.

Partnership
A partnership is a business owned, operated and managed by two or more individuals. Each partner contributes cash, property and/or services to the partnership. A partnership shares many of the benefits and drawbacks of the sole proprietorship. Each partner is personally liable for the debts of the partnership. A general partnership can be formed without any formality and may be as formal or informal as the partners wish, but without a written agreement it could be difficult to enforce a partner's rights or ownership interest. A partnership comes to an end whenever any partner decides he or she no longer wants to be part of the business or if a partner dies, retires, or becomes bankrupt.

A partnership is also very similar to a sole proprietorship in regards to tax rates.

Corporation
Corporations are legal separate entities created by the state which are separate and apart from its owners. The most significant attribute of the corporation is its ability to shield its owners from personal liability. Shareholders are not liable for the debts of the business. if the corporation is run correctly, the corporation is responsible for its own debts.

The corporation has a perpetual life, meaning it continues forever. Even if one of the shareholders dies, retires, or chooses to leave the business, the corporation will remain in existence. Because of the advantages just mentioned the corporation is the choice for many individuals forming a business with a partner.

With all of the benefits listed above, why isn't the corporation the perfect business entity for all individuals? Because of the federal government's tax laws. A C-Corporation must pay double taxes on dividends. First, as income to the corporation and then as dividend income to the owner or shareholder.

"S" Corporation
Unlike the regular or "C-Corporation" the S-Corporation avoids double taxation. The S-Corp. is like a partnership for tax purposes in that the profits or losses pass through to the owners which is to be reported on their personal tax return. Therefore, the S-Corporation protects your personal assets but pays lower taxes than a C-Corporation.

In both the C-Corporation and the S-Corporation you must maintain certain corporate formalities in order to protect your personal assets. Such as maintaining corporate records of the directors, officers and/or shareholders. Also, the corporation must have a separate bank account and file a separate tax return.

Limited Liability Company
The Limited Liabitily Company or "LLC" is the newest type of business entity. The owners of an LLC, are called members and actively participate in the management of the business without becoming liable for the debts of the business. If a member wants to sell or transfer his units or shares in the LLC, it must be approved by the other members. Supposedly, the members of the LLC pay tax rates which are similar to that of a sole proprietorship.

Now that you know the types of entities that are available and the benefits and drawbacks of each, which one is the right one for you? If you are confused, don't worry, that's what we are here for. We will help to clarify any question you may have, and steer you in the right direction.