Most books on starting a small business start with a chapter on deciding your business type. Sometimes they are called Choice of Entity chapters and they cover the major types of business structures in the United States today. Those types are:
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Sole Proprietorship (one owner)
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Partnerships (more than one owner)
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Corporations including S Corporations and C Corporations (owned by shareholders)
Business guides tell you that making a decision on your business entity is a serious decision and must be made before you begin your business. You are told to do extensive reading and are advised to consult a lawyer. It can stop you in your tracks before you get started!
These guides are well intended, but are overkill for micro businesses. Micros are sole proprietorships (meaning one and only one owner) and here’s why:
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Quick to start
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No partnership agreements
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No corporation status needed. Corporations need to file with their Secretary of State, pay a fee and usually abide by some reporting requirements.
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Easiest to close. Partnerships and corporations are sometimes more work to shut down than to start up becasue of legal entanglements. But a sole proprietorship closes down when the owner decides he or she wants to move on.
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Easy to understand. Partnerships and corporations usually need a lawyer to draft contracts with legal language t0 protect all the people involved.
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Simplest tax structure. A sole proprietorship uses a two page form, Schedule C Business Income or Loss (or the simpler one page form , Schedule C-EZ) and attaches it to their personal tax return. Partnerships and corporations require completely separate multi-page tax returns and additional forms added to the owners individual forms.
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No lawyer needed. Lawyers might be a good idea if you are signing a lease or applying for a patent, but most micros work from home and never invent anything new, so they can operate for years without needing a lawyer.
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No accountant needed (but recommended for an initial consultant and for tax preparation).
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You keep the profits. Partnerships and corporations distribute their profits to partners or shareholders.
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No investors to keep happy. You, the micro owner, need to be happy with your business’ progress, not outside investors or partners.
So don’t get bogged down with deciding a business entity before you launch your micro business. Simply start as a sole proprietorship. If you become phenomenally successful, then look into S Corporation or C corporation status to see if it might be beneficial.
My book, Starting a Micro Business discusses more reasons why you should start your micro business as a sole proprietor and avoid partnerships.
Carol Topp, CPA is the author of the Micro Business for Teens.
