Best Business Entity for the Environmental Niche – GWC Mag

You’re Starting an Environmental Business. Which Is The Best Business Entity For It?

 

 

 

 

Starting an environmental business is a noble pursuit, so congratulations on beginning your entrepreneurial journey! But being an entrepreneur comes with many decisions to make, including the best type of business entity to form.

We’re here to help with an explanation of your options and some advice on how to choose the business entity that’s right for you.

 

Sole Proprietorship 

If you’re starting a business on your own and you simply start doing business, by default, you’ll be operating as a sole proprietorship.

A sole proprietorship is considered a disregarded entity by the IRS, which essentially means that they consider you and the business as one and the same entity. You’ll report income from the business on your personal tax returns and pay taxes at your personal tax rate, and your business name will be your name unless you register a “Doing Business As” (DBA) name.

But it also means that you are personally responsible for the debts and obligations of the business, and that if the business is sued, you are personally liable. This means that all your personal assets, including your home, could be at risk.  This might mean it’s not the next business entity for you.

 

General Partnership

A general partnership is quite similar to a sole proprietorship, and it’s what your business will be by default if you’re starting your business with a partner or partners. Your business name will be the names of you and your partners and profits will be reported on your personal tax returns.

But again, you’ll be personally liable for the obligations of the business, putting your personal assets at risk.

General partnerships also have to file a U.S. Return of Partnership Income, Form 1065, but it’s for informational purposes only. The business itself is not taxed.

The advantage of a sole proprietorship and general partnership is simplicity. You don’t have to file anything with the state to start doing business, which means no fees. You also don’t have to pay separate business and personal taxes.

But the downside, and it’s a big one, is that you’re personally liable for the obligations of the business.

 

Corporation

A corporation is a different animal. It requires filing formation documents with the state, and you must follow corporate laws. You have to appoint a board of directors which must meet annually, and you must also appoint officers of the company.

It’s much more complex to start and manage a corporation, but the corporation is considered a separate entity from its owners, meaning that you and other owners are NOT personally liable for the obligations of the corporation.

However, corporations are also taxable entities. You’ll pay corporate taxes on the profits of the business, and you’ll have to pay yourself a salary from the business, which will be subject to income and employment taxes. Any dividends you’re paid from the profits of the business are also taxable.

The main advantage of a corporation, other than the personal liability protection, is that it’s more attractive to investors than other business entity types. The ownership of a corporation is measured in shares, which are easily sold or transferred, so investors can simply receive a number of shares in exchange for investment capital.

 

Limited Liability Company (LLC)

An LLC provides the best of both worlds in terms of a business entity.

LLC benefits include personal liability protection because the LLC is considered a separate entity from its owners, called members. Additionally, LLCs are taxed like a sole proprietorship if they have one member, or a general partnership if they have multiple members. Unlike a corporation, the LLC is not taxed.

An LLC also does not come with corporate requirements such as a board of directors. LLC members are free to manage the business in any way that they choose. LLCs are also simple to form, although the formation comes with a fee.

The only real downside of an LLC is that they’re less attractive to investors than corporations. LLC ownership is measured in percentages and is more difficult to transfer than the shares of a corporation.

Still, an LLC is the most popular option for new business owners because, again, it offers the best of both worlds. Unless you’re planning to raise investment capital for your business, an LLC is likely your best choice.

continued below….

 

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How to Form an LLC

Forming an LLC involves a few simple steps.

Choose a Registered Agent – All states require that an LLC appoint a registered agent. A registered agent is a person or company authorized to accept correspondence, such as legal or financial documents, on behalf of your LLC. You can be your own registered agent, or you can appoint another individual or a registered agent service. The downside of being your own registered agent is that you have to be personally available at your registered address during business hours to accept correspondence.

File Documents with the State – Officially forming your LLC requires filing articles of organization with your state, although in some states the document is called a certificate of formation or a certificate or organization. The document is generally very simple and can be filed online in most states on the Secretary of State’s website. Fees to file range from $40 to $500.

Create an Operating Agreement – An operating agreement is a document that defines the ownership of your LLC, as well as how profits are distributed, the management structure, voting rights of members, how disputes are resolved, and much more. One is not required in most states, nor is it filed with the state, but it’s crucial to have one. You can find operating agreement templates online for a nominal fee, or you can have one drawn up by an attorney, which obviously will cost more.

 

In Closing

The best business entity for you depends on your type of business, its ownership, and your future plans, but in many cases, an LLC is the best choice because of the many benefits it offers. If you’re in doubt, consult with an attorney or tax advisor to determine the best choice for you.

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