Selecting The Legal Structure For Your Cleaning Business

Writen by Steve Hanson

One of the most important decisions you will make when starting your cleaning business is deciding which type of legal structure is right for your business. The type of entity you choose will determine the amount of taxes you pay and guide you in the amount of paperwork you will have to deal with. It will also determine how much personal liability you have in the business, and can be a factor in raising money or borrowing money for your new business.

It is best to spend the time in the beginning to make sure that the entity you choose is the one most suitable for your particular circumstances. You can get advice on choosing your legal entity from the local small business administration, your accountant, and your attorney.

The different types of legal entities are:

*Sole Proprietor. This is the easiest type of business to form and is one of the most common for small businesses. You have complete control over your business and do not have to report to anyone. The drawback to a sole proprietorship is that the owner is personally liable for all financial obligations of the business. This means that if your business is sued you can be held personally responsible. Another drawback is that you are responsible for the entire sum of FICA taxes due. Normally the employer is responsible to match the employee's share, but when you are a sole proprietor, you must pay the entire 15%.

*Partnership. This type of business involves two or more people who agree to share in the profits and the losses of a business. The profits or losses are passed on to each partner and it is reported on their respective tax returns. Like a sole proprietorship, partners are responsible for the financial obligations of the business.

*Corporation. This is a legal entity in itself that is created to conduct business. The corporation is separate from the individuals that form the business and handle the responsibilities of the organization. Just like a person, the corporation can be taxed and it is also held legally responsible for its actions. A key benefit of a corporation is that the owner avoids the personal liability that occurs with a sole proprietorship or partnership form of business.

*C Corporations are typically large companies and are publicly held. If a C Corporation pays out dividends, then the profits are double taxed. The C Corporation must file a return on its own behalf and pays taxes on its profits before dividends are paid to its shareholders. The shareholders must then claim the dividends as income, which are taxed again.

*S Corporations elect a special tax status with the IRS and, therefore, do not face double taxation. The corporation is not treated as a separate entity; the profits are passed on to shareholders just as if the business was a partnership or sole proprietorship. The corporation itself does not pay taxes. However, there are strict requirements that an S Corporation must follow. Each stockholder of the S Corporation must be a US citizen and there is a limit to the number of stockholders an S Corporation can have. S Corporations can be appropriate for small business owners who want the legal protection of a corporation, but want the tax benefits of a partnership or a sole proprietorship.

*Limited Liability Corporation. This is a hybrid type of partnership. It allows owners to take advantage of the benefits of a corporation and a partnership form of business. Like a partnership, profits and/or losses are passed through to owners and like a corporation, owners are shielded from personal liability.

How do you know what business structure will work for your cleaning business? There are several factors to take into consideration when determining your business structure.

1. Legal liability. With a sole proprietorship or partnership you can be held personal responsible for the business, which means your personal assets can be taken if the business is sued.

2. Taxes. There can be a big cost savings in choosing one type of business structure over another. C-Corporations are "double taxed". The business profits are taxed and the money that is passed on to you as the owner is taxed again.

3. Management and flexibility. Do you want to have total control over the business? In a partnership or corporation there are agreements and bi-laws that you have to abide by.

4. Cost of formation and administration. Sole proprietorships are the easiest type of business to set up and maintain. There are very few legal forms or tax requirements other than just general good recordkeeping. A partnership needs to have a partnership agreement drawn up ahead of time. Both corporations and limited liability corporations need to have legal documents prepared before the business begins operation.

5. Future needs. Where do you anticipate the business being in 3 years or 5 years? If something happens to the owner, what happens to the business?

Your cleaning business can be successful with hard work and dedication. Choosing the appropriate business structure can make your task as a business owner much easier if you research your options before signing up your first client. Discuss the various business entity options with a professional before making your final decision.

Steve Hanson is co-founding member of The Janitorial Store (TM), an online community for owners and managers of cleaning companies who want to build a more profitable and successful cleaning business. Sign up for Trash Talk: Tip of the Week at http://www.TheJanitorialStore.com and receive a Free Gift! Read cleaning success stories from owners of cleaning companies at http://www.cleaning-success.com