Individual vs Corporation: Everything You Need to Know
Understanding the difference between individual vs corporation is important when owning a business.3 min read
Understanding the difference between individual vs corporation is important when owning a business. When a person operates his or her own company and does not incorporate the business, this means the business is being operated as an extension of that person.
This is most commonly referred to as a sole proprietorship. In regards to taxes, the profits and losses of the company will flow through the person's personal taxes. This means that any profits earned by the company are reported as income on the person's personal taxes, while losses are reported as deductions.
Understanding the Importance of Picking a Business Structure
If you are wanting to start your own company, it is imperative to understand that the liabilities of the company will fall on your own shoulders unless you choose to incorporate the company. For example, if you own your own hair salon and you have people come to your house to get their hair cut and one of them gets injured on your property, then it will be your responsibility to cover the person's medical expenses as well as lost wages and pain and suffering.
Still, for most home-based businesses, operating as a sole proprietorship is usually the best choice to make.
What Is a DBA?
If you don't want to use your own personal name to operate the company, you can always file for a DBA.
DBA stands for doing business as, and it means that you are going to operate your personal business under a different name from your own personal name. If you do not incorporate the company, you cannot add LLC, Inc, or Corporation to your DBA name. For example, if you own a cleaning company and you don't incorporate it, you can operate at Wishy Washy Cleaning, but you can't operate as Wishy Washy Inc.
Incorporating the Business As an LLC
A lot of people who are sole proprietors will end up incorporating themselves as a limited liability company, also known as an LLC. When you do this, it means you add protection to yourself as the owner of the company. More so, it means that your personal assets can't be touched for any outstanding business debts.
Even if you incorporate yourself as an LLC, if you are the only owner, then the IRS will most likely treat you like a sole proprietor in that you will file your profits and losses on your personal income taxes.
There are several steps you will need to take to become an LLC, and these steps are going to vary from one state to the next. You will need to check with your state's small business administration office to see which steps you need to take.
Most times, you will need to file an articles of organization. You may or may not have to file a membership agreement. The purpose of filing these documents is to let the government know exactly what type of business you are operating. The pieces of information you will need to include are:
- Name of business
- Your DBA if you have one
- Your business' postal address
- Its purpose
- Names of members
- Roles within the organization
You will also have to pay a fee if you want to become an LLC. Once again, this amount is going to vary from state to state. In some states, it will cost you more than $1,000 to become an LLC. If you are dealing with large sums of money, it is usually best to become an LLC. In doing so, you can protect your personal assets from being seized to pay for business-related debts.
How to Become a Corporation
If you want to become a corporation, this means that it is going to have at least on one stockholder. If you want, you can have other stockholders too. You will also need to elect a board of directors; this board is going to be chosen by the stockholders. The board of directors will also appoint officers who will determine how the day-to-day operations of the company are going to be.
In most cases, if you choose to become a corporation, your losses and profits from the company are not going to flow through your personal taxes.
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