Choosing a Form of Business for your Pressure/Power Washing Business
One of the first choices you will need to make is what form of business will be used for your pressure washing company. There are four basic forms of business to choose from. They are as follows:
* Sole Proprietorship
* Partnership
* Sub S Corporation
* Limited Liability Company (LLC)
Sole Proprietorships
Many small companies begin as sole proprietorships. The main reason for this is that they are easy to form. All you generally need a business license and a checking account. Sole Proprietorships have one owner who makes all decisions and is personally liable for the company. They own all the assets of the business and receive all the profits generated. In the eyes of the IRS the owner and the company are one in the same.
There are several advantages to a sole proprietorship. First, this is the easiest form of business to organize and you do not need an attorney or accountant. Taxes for a sole proprietorship are relatively simple. A schedule C is filed along with your personal return. Most tax programs include a schedule C this at no additional charge. If you wish to shut down the company it is fairly easy and straight forward to do.
The disadvantages of a sole proprietorship are also numerous. The owner bears all the liability of the company. If the business incurred a liability from a lawsuit the owner would be personally liable. (a liability insurance policy can help cover this) Also, certain benefits like health insurance may not be fully deductible. Also, you will have to pay social security on all the companies profits. In other words there are some tax disadvantages. Finally, a sole proprietorship may be taken less seriously than an incorporated business or an LLC. This can make borrowing money more difficult at times. Also, audits by the IRS may be a little more frequent for this form of business.
Partnerships
In a Partnership, two or more people share ownership of a single business. Like proprietorships, the law considers the business and the owners as the same. In this form of business an attorney or accountant may be necessary because there will be a partnership agreement which outlines out all the terms of the partnership. It covers how profits are divided, buyout provisions, etc… Because you now have two or more people involved the paper work and upfront preparation is multiplied.
The advantages of a partnership are similar to a sole proprietorship. Additionally, more money can be raised with a partnership and there should be more expertise present in the business. Like a sole proprietorship, profits flow directly to each partner’s tax returns.
The disadvantages of a partnership are the same as a proprietorship but will also include a lack of control by any one partner which can lead to slow decision making. Also the liability for one partner because of the actions of another partner is an issue. Plus, the partnership in many cases is dissolved if one partner passes away. Finally, profits must be split. If profits are sparse this can lead to problems.
Subchapter S Corporations
A corporation chartered by the state in which it is located is considered by that state to be a unique entity, separate from the shareholders who own it. A corporation can be taxed separately from its owners and is liable for itself meaning it can be sued and can enter into contractual agreements that do not involve the shareholders. The owners of a corporation are its shareholders and corporations have a perpetual life until dissolved. Ownership can transfer from one stockholder to another fairly easily.
A Sub S Corporation is actually a tax election only and is done after a corporation is formed through the IRS . The sub s election enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to their personal tax return via a form called a K1. Many people prefer this type of ownership because of limited liability to the shareholder and the tax savings. Except in the case of negligence, the shareholder is generally not personally liable for what the corporation does. For example, if an employee borrows a company car and injures someone while they are driving then the employee would be personally liable since they were negligent and were driving. Secondly, the corporation would be liable since it owned the car. However, the shareholders of the company would not be personally liable for the event. As far as taxation goes a shareholder can take a fair salary and take the rest of earnings in the form of a draw just as an owner of ATT stock would get a dividend. It is important that you take a fair salary to avoid future social security liability.
Limited Liability Company (LLC)
The LLC or Limited Liability Company is a relatively new type of business structure that is now available in most states. It is designed to provide limited liability similar to that of a corporation and the tax efficiencies and operational flexibility of a partnership. Forming an LLC is more complicated than a general partnership or sole proprietorship but easier than a Sub S corporation.
The owners are members, and the duration of the LLC is normally decided when the organizational documents are filed. LLCs cannot have more than two of the four characteristics that define corporations. These are as follows:
- Limited liability to the extent of assets
- Continuity of life
- Centralization of management
- Free transferability of ownership interests.
If the company has more than two it must file as a corporation.
Before you decide on the business form you will use you should sit down with an attorney or your accountant and discuss all of the facts and how they will affect you personally and on a tax basis. Once a business form is elected it is difficult to undo.
In closing I will say that for a pressure washing business most people choose either an S Corporation or an LLC. Mainly for the liability limits and the tax advantages. Also, with a corporation you will almost always have a separate name which you can choose. When you sell the business you can transfer your shares to another person and you are done.