Corporation

How To Make Your Sole Proprietorship Legitimate

If you started a side business as a hobby, or do freelance work as a photographer or writer, then you may already own a sole proprietorship without you even realizing it. Unlike LLCs or corporations, a sole proprietorship is a one-person business that is not registered with the state. Sole proprietors include those that provide work on a contract basis, independent contractors, or commission-only salespersons.

Although sole proprietorships are the easiest business entity to create, there are still business licenses, permits, and other local registrations that you may need to apply for in order to make your business legal and legitimate. 

For example, even if you're running your business as a sole proprietorship, most counties or cities require that you register and obtain a business license. In addition, you may need to obtain an employer identification number (EIN) from the IRS if you have any employees.

Besides a business license or tax ID number, you may also need a certification or license for your specific profession. For example, contractors need a specific license for each type of work they perform and real estate agents need a real estate license. While these may be more obvious examples, it is always important to check your local city ordinances to make sure you don't need a special license to operate your specific business.

Lastly, if you are doing business under any name other than your own (e.g. "Custom Bikes" instead of "John Doe's Bikes") you need to register your "doing business as" name with the state of Utah. This is a relatively simple process and can be done online, however it does require a fee. 

While the relative ease and low cost of starting a sole proprietorship may seem intriguing, it is still worthwhile to consider forming an LLC or corporation instead. The reason being is that a sole proprietor is personally liable for all of the business' debts and obligations whereas the owner of an LLC or corporation is generally shielded from any personal liability. 

To best understand what business entity best fits your need, you can schedule a free consultation with J. Cutler Law. In your initial consultation, we will evaluate your unique situation and recommend a sole proprietorship, LLC, or corporation. And no matter what business entity you decide, we can help guide you along the process of making your business legitimate. 

 

 

 

Is a corporation the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. In the last part of this series, we will discuss the pros and cons of the corporation.

Corporation

A corporation is a distinct legal entity, both for legal and tax purposes. It is deemed to have an existence separate and apart from its owners, the shareholders. A corporation has all of the powers and rights of a natural person, including the right to own property, to sue and be sued, and to enter into binding contracts.

Although owned by its shareholders, a corporation is controlled by the board of directors, which is elected by the shareholders. The shareholders' participation in the management of the corporation is essentially limited to electing the directors and voting on certain major corporate actions. However, shareholders may elect themselves to the board of directors and may still participate in management.

While the directors control and are permitted to manage the corporation, the board of directors generally appoints officers to manage the corporation's day-to-day operations. In smaller corporations, such as S corporations, the shareholders are often also the directors and officers.

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Pros

  • The corporation enjoys a separate legal existence with its own rights, privileges. and liabilities apart from the shareholders.
  • The shareholders' liability is limited to the amount they paid for their shares in the corporation.
  • Directors and officers are normally insulated from personal liability for the debts and obligations of the corporation.
  • Additional investment are generally easier to obtain, i.e., corporations may obtain investments from third party sources in exchange for the sale of stock.

Cons

  • Corporate formalities must be observed such as annual shareholder meetings and regular director meetings, among other formalities. 
  • Increased cost to form and operate a corporation, i.e., file articles, draft bylaws, shareholder agreements, file annual reports, etc.
  • Potentially decreased personal control of the business because of the separate roles of shareholders, directors, and officers.
  • The profits and losses of a C corporation are subject to double taxation: once at the corporate level when earned; and then at the shareholder level when distributed (does not apply to S corporations).

S Corporation

For legal purposes, an S corporation is no different than any other corporation. However, an S Corporation enjoys certain tax benefits. For instance, an S corporation is considered a pass-through entity, similar to partnerships. In this manner, the S corporation escapes the double taxation on dividend distributions of a C corporation, and the shareholders are allowed to offset losses sustained by the S corporation against their other income. 

Not all corporations may become S corporations.  The corporation must have no more than 100 shareholders, must have only one class of stock, and shareholders cannot be a corporation, LLC, or partnership, among other restrictions.

Summary

A corporation is a good choice for business owners that are seeking to minimize their personal liability, do not mind the increased formalities and operating costs of a corporation, and are seeking outside investors. While the double taxation of income of a C corporations is a downside, most new corporations can quality as an S corporation to avoid this. 

If you have any questions regarding your new business, or would like assistance forming your corporation, schedule a free consultation with J.Cutler Law.