Today I will talk about the different types of businesses – not the burger business or the noodle business – but actual business classifications. When you get ready to start your business, it is very important to think this phase through before opening your doors. How do you want to classify your business? Your options include sole proprietorship, partnership, limited liability company, S-Corporation and C-Corporation. It is very important that you do your research, since each type of business has its perks and downfalls.
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I will talk to you first about the Sole Proprietorship, as that is the type of business I established. In this form of business, it is you and you only. This means that your personal money and assets are at risk, because legally, your personal money is considered business money. Other than filing a “Doing Business As” certificate with your local county (the procedure in most states, but be sure to consult with an attorney in your locality), there is no distinction between you (personally) and your company.
For example, say you make $3,000.00 in one month. You will be required to keep a record of this in your personal and also in your business check ledger. For accounting purposes, you will need to write yourself a paycheck, meaning you are getting paid from your company. You cannot just take the money, but instead you must leave a paper trail or risk a negative IRS audit during tax season.
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In a sole proprietorship, if you do business like I do and perform consulting work from your own house, you can deduct a certain percentage of your rent, utilities, and such as a business expense. Make sure to check with an accountant on the exact details for this deduction mechanism. A good rule of thumb is to set up an office room in your house and measure it. Then take the total square footage of your office space and divide it by the total space in your house to get your deduction amount. Here is an example:
Your total house: 1800 sqft
Your office: 400 sqft
So dividing 400 by 1800 gives you about 22%. That means you can take about 22% of your electricity bill and make it a business expense. Or you can take 22% of your rent payment and write it off. ****Again, be sure to check with a certified public accountant before you start doing this so that you have the correct information.***
Another awesome item about Sole Proprietorships is that you can take business trips and deduct those expenses (provided you can show that the trip was for business purposes). Make sure you keep all your receipts, as you will be required to show a copy of them at tax time. So say you are taking a trip to meet a client, and you need to get an airline ticket, car rental, gas for the car and a hotel room. Those are all business expenses and you can write them off. This is really useful, especially if you are making a lot of money because these deductions can reduce your tax bill at the end of the year. Other items such as supplies for your office are also business write-offs. Again, make sure to keep your receipts and document the expenses so at the end of the year, you can enjoy the tax break.
With time, you will eventually pay what are called quarterly taxes, and then yearly taxes. However, because you work for yourself, your taxes will be higher than if you were working for someone else or your business was a corporation. Working for yourself, you are required to pay Self Employment Tax. This is double what you would normally pay because if you had your own corporation or worked for a company, those entities would pay half of this tax (or its equivalent) for you. However, when you work for yourself, you must pay this tax in full. So your tax bill can be a tad bit higher than normal.
As I mentioned earlier, there are other business types, and each one of those has benefits and pitfalls. So before you go out and start your business, make sure you decide which approach you want to take. The rule of thumb is to always start small and get bigger. So as your business grows, you can consider going from a Sole Proprietorship to an LLC to a Corporation. No matter which way you go, be sure to consult an attorney and accountant when deciding upon the type of business entity you want to form.
Joshua Kelly is a 13-year United States Navy Veteran. Joshua holds a Bachelor’s Degree in Natural Science and Math. Along with several military decorations, Joshua was certified as a Community College of the Air Force Instructor. Joshua is currently self-employed with Dakota Weather Consultants.
“I am passionate about the military way of life and also the self-employed way of the future, and of course, the weather. You will find me, every day, running my weather consulting firm when I am not spending time with my family. I enjoy sharing information by writing to help others prepare themselves and learn from my experiences”. Joshua Kelly