How to Properly Structure Your Business to Build Business Credit without a Personal GuaranteeJan 31, 2021
If you have made it this far, then congratulations on deciding to start your business! The American dream is to be a pioneer. Whether it's the discovery of new land, or creating a new industry, we pride ourselves on our ability to do things first! Many people start a business to create income for their family, others find a way to build the community around them by providing valuable resources and creating new jobs. Whatever your reason, congrats, you've made it!
Now that we have decided to start our new business, we just need to know where to begin. Well, you're in luck! There are several factors that come into play when determining the corporate structure. The entity type will determine how both the business and the business owner are held liable as well as play a crucial part in taxation.
Let's first discuss the different types of business structures:
Sole Proprietorship - When you set up a company as a sole proprietorship, or a (Sole-Prop), you are physically assuming all debt of the company. You do not need a tax id number. You will use your social security number for tax purposes. (This structure will not work for building business credit, since you will have to personally guarantee every account that you get.)
Limited Liability Company (LLC) - When you set up a Limited Liability Company, you're doing just that, you are limiting the Liability of your Company. That means that the business is held liable financially and not the business owner. You will be able to register for a Tax ID Number (EIN) and your business will be separate from your person.
-This structure has the characteristics of a corporation (Limited Liability as well as credibility) as well as the tax incentives of a partnership (pass-through taxation and flexibility).
-Dependent on your business type, you may want to consult a CPA or your Tax Accountant prior to setting your business up.
(Unlike a Sole Proprietorship, a Limited Liability Company does work for building business credit and is probably the most common business structure selected for that purpose.)
Incorporated - (Aka Inc.) A business is considered Incorporated, when it registers with the state to be formed as a Corporation. There are 2 types of Corporations:
S-Corp- An S-Corp, is a corporation that has decided to be taxed under Subchapter S of the Internal Revenue Code. This makes an S-Corp a "pass- through" entity for tax purposes. (This structure will work for building business credit and is the second most common selection of structure for that purpose).
C-Corp - A C-Corp is a classification that protects the owner's personal assets from creditors. C-Corp's can have an unlimited number of owners as well as multiple classes of stock. C-Corps are not "pass-through" entity's and are subject to a corporate level of taxes. (This structure also works for building business credit, but is not suggested for a small business, specifically due to the tax classification).
Non Profit - Non Profit is a classification for a company where the company reinvests all profit back into the organization. A non-profit usually has a staff consisting of volunteers, but sometimes do hire and pay higher-level employees. (Although it is not common, this structure does work for building business credit).
Now that you have a basic understanding of the different types of corporate structures, it's time now to set up our business. Since the most common type of structure is an LLC, we will assume that is the classification we will select. In order to get started, you will want to head over to your local secretary of state. In most states, you can set your company up online. You must first identify the website of the secretary of state for where you want to organize your company. Usually a google search will suffice. Once you have your state's Secretary of State pulled up, you will need to do a Corp Search to ensure that your business name is available. (For an LLC, you may have to search the name you wish to use, then attach LLC on the end. Example: my company, LLC)
If the name is available, you will need to pay the registration fees to assume ownership of that company name and register your company. Dependent on your business, you will also want to ensure you are following the proper procedures when it comes to filling out the correct forms as well as tax preparation (again, a certified tax professional is suggested.)
Once you complete the filing for your business and you receive your company's Articles of Incorporation, you will want to go to www.irs.gov and apply for your company's Tax Identification Number. There is not a charge to request a tax identification number. I would suggest creating a file on your computer to store all of your company information for easy reference.
Again, it is suggested prior to forming a company, to seek legal advice from a certified tax professional, but this should provide a basic understanding of the different structures available to business owners.
For more information on how business credit works or if you are interested in a more hands on approach to developing business credit, you can click this link to learn more information about business credit, or sign up with one of our digital courses!
We have also created a free guide to building business credit! Click the link below to get started!
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