27Jul
Starting your own business is an exciting opportunity, but it brings with it some seemingly arduous decisions. It can be daunting to make business decisions, especially if you are inexperienced–a newbie–in business formation.
But don’t worry—you’re in the same boat that a lot of other people occupy. According to the Small Business Administration, there are almost 30 million small businesses in the United States alone. Kicking off your business can certainly be accomplished if you put your mind to it.
Here are a few questions that will help you get your business idea off the ground–business formation for newbies, really.
Clear ideas are foundational for a good business. The most successful companies are laser-focused on what they do and why that matters in their market of choice. You don’t need to have every element of branding and marketing in place before you start, but you should have a good idea of your product or service and general market.
Once you determine the type of business, you can develop the business model. This is just a fancy way of explaining how you make money. Some business models are easy to determine. For example, you make something and sell it directly to customers, hence you have a direct sales model for your company. But what if you make something and instead want a third-party to sell your product? That would be a manufacturing model.
After you determine the type of business and business model, you can ask the next question.
Businesses have different structures depending on what they do. In order to form a successful business, you need to have the correct structure in place to properly work for you and your business model. The following are the most common forms of businesses in the United States.
Sole proprietorships are the easiest to form, as they do not require start-up or maintenance costs and are not regulated heavily. As a sole proprietor, you are self-employed and will be taxed as such, and your business income is one and the same as your personal income.
LLCs are versatile and can be taxed as a sole proprietorship, partnership, or corporation depending on the situation. The core difference between an LLC and a sole proprietorship is that an LLC separates your business income from your personal income. As a result, it offers a barrier of financial and legal protection between your business and yourself.
However, LLCs take more effort to form. In order to create that liability barrier between your business and yourself, LLCs must be registered with the government and are subject to fees and regulations in order to maintain the LLC status.
Like sole proprietorships, partnerships are considered as pass-through business entity. This means that profits of the business conflate with the profits of the individual. The main difference between partnerships and sole proprietorships is that in partnerships income is split between two or more partners according to the ownership split among partners.
Unlike LLCs or sole proprietorships, corporations are taxed as a separate entity and their tax responsibility is not passed through to the individual. Corporations pay income taxes on revenue, and shareholders for a corporation are not responsible for that corporation’s debts.
Unlike sole proprietorships or LLCs with the sole proprietorship tax designation, where all income falls under the purview of income tax, only salaries are subject to income tax for corporations. In addition, corporations continue even if the original owner quits, is fired by the shareholders, or dies.
Are you in the opening stages of forming a business? Make sure to ask yourself the top two questions in this article first–what type of business are you starting and what business structure works for you. Your business type will help you discover the best business structure, and deciding on a business structure is an important decision with many tax implications. The first step in business formation for newbies is to ask the right questions, and if you have more than are listed here, feel free to contact us for a consultation.
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