Start Your Own Business - Part 2
I kept you all waiting an extra day, I know it must have been difficult.
Let’s jump back in and look at more options when it comes to starting your own business, presented in plain English to the best of my remedial ability.
A corporation is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
Plain English - Any big company you know of is likely built with this structure. Think Oscorp from Spiderman; the Board of Directors represents the shareholders and can fire anyone, even the founder themselves.
A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business. Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.
Plain English - Pursuit and Tie is an LLC, but also a partnership since Kellie and I have a written agreement over sharing profits and losses. If we ever decide to split, we honor the agreement.
An S corporation (also referred to as an S corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. An S corp is a corporation with the Subchapter S designation from the IRS. What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed. There is an important caveat, however: any shareholder who works for the company must pay him or herself "reasonable compensation." Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as "wages."
Plain English - Wow. I am not even sure if my summary will be correct given how complex this sounds. But to hazard a guess - basically if you have to log P&L on your personal tax return but also have a board of directors, you might be an S Corporation. But I really don’t know.
So there you have it - six ways to look at starting that necessary side hustle. Next week, let’s take a look at the options you have if you want to work 9-5 somewhere, such as how working for an agency is different than a company and that kinda cool stuff.