One of the common questions that we have seen is what type of corporate entity should be used when starting a boutique. There are several operations to choose from such as a sole proprietorship, S-Corp, LLC (limited liability company), C-Corp, or Partnership. On a quick side note, this is a decision that should not be taken lightly. You should absolutely coordinate these decisions with a certified public accountant or tax attorney. The type of corporate structure that you will use will have a drastic effect on the way that you file taxes and the accounting systems that you will use. In this article, we will take a look at the different types of corporate entities while also discussing different considerations when going through this process.
Sole Proprietorship
When you operating your online boutique as a sole proprietorship – all revenues, expenses, and profits are recorded on your personal tax return. One of the major issues with operating a business in this capacity is that you are subject to unlimited liability in the event that litigation occurs. Additionally, you will be personally liable for any debts that are accrued by the business.
If you are going to operate your boutique as a sole proprietorship then you can start right away without filing any necessary paperwork with the state. Of course, you may want to register your doing business as name (often called a DBA) so that other companies within your state cannot use it.
It should be noted that you may have difficulty obtain private investment or a business loan if you operate as a sole proprietor. By using a corporation or LLC, you will be able to shield yourself from certain liabilities. This will substantially reduce the risks associated with any financing that is provided to you by a third party.
Partnership
This structure is similar so that of a sole proprietorship except that is involves two or more people. Similarly, there is unlimited liability when you operate as a partnership. The same rules apply. However, a partnership agreement needs to be in place by all owners of the business. This agreement showcases which owners own a certain percentage of the business as well as their roles and responsibilities as it relates to the online boutique.
If you are thinking about starting a partnership and will require a partnership agreement then you should work with an attorney to develop this type of documentation. As with any agreement among two or more parties, there can be significant challenges down the road if there is a disagreement among any of the partners.
Alternatively, if you or your partners do not want to use an attorney for this purpose (which is recommended) then you can use templates from LegalTemplates.net or RocketLaywer.com in order to create this document.
Corporations
In regards to taxation, there are two types of corporations – C-Corporations (sometimes called regulation corporations) and S-Corporations. The paperwork involved with creating this type of legal entity is generally the same. The primary designation comes from the IRS. When you elect to be treated as an S-Corp, then the profits of the business are included on your personal tax returns. This is often called a pass-through tax entity. A regulation corporation does not pass its income to the owners. Instead, the corporation itself pays taxes on its income. If you then remove profits from a regular corporation, you will be taxed again on the profits. This is why many entrepreneurs elect to use an S-Corp in most instances.
One of the primary rules of establishing an S-Corp is that its owners must be actual people. In the future, if you are looking to raise capital from private investors, this may cause an issue if the funding source conducts their operations through a corporation, LLC, or limited partnership. Again, working with both an attorney and a CPA will help you in addressing these issues on an ongoing basis.
Limited Liability Companies (LLC)
These entities are sort of a hybrid between a corporation and a partnership. A limited liability company has an operating agreement among its members. This document clearly outlines the roles and responsibilities of each member and their ownership interest in the business. They are highly versatile corporate entities that can also have pass-through income features. Additionally, different members can have different ownership rates but can also have higher percentage payouts of dividends. The immense versatility of these corporate entities has made them very popular. They are available in all 50 states.
Additionally, it is very easy to use a LLC when you are raising capital from a private investor. They can be included as a member for your online boutique and their percentage ownership can be allocated within the operating agreement.
The LLC operating agreement is a complicated document and states have different regulations as to how these documents need to be drafted. You can use the numerous state-based templates available from LegalTemplates.net to assist you in creating a single member or multi-member limited liability company.
One of the primary additional advantages of operating your boutique as a limited liability company is that the ongoing reporting and recordkeeping requirements are relatively minimal.
How much does it cost to create a corporation for my online boutique?
The costs of creating a corporation in most states are relatively low. Generally, the fees range from $100 to $200 to file the necessary paperwork.
Can I do an incorporation on my own?
Absolutely! Although it is recommended that you work with a CPA or attorney for this matter, there is nothing that prohibits you from completing this process on your own. There are also a large number of services that can do an incorporation on your behalf. These services include:
Beyond establishing a corporation or LLC, what else will I need?
Once you establish your corporate entity, you will need an EIN or FEIN number for your organization. This is a tax identification number. It is very easy to obtain from the IRS website..
What are the benefits of using a corporation or LLC?
Foremost, you will be able to protect your personal assets in the event that litigation occurs as a result of your operations as an online boutique. For these types of businesses, the ongoing legal threats that can occur are somewhat limited. These risks can be reduced by having proper general liability and professional liability policies in place. A corporation will typically shield all of your personal assets in the event that the business becomes bankrupt or faces a litigation matter. This is why even smaller scale entrepreneurs almost always use corporate entities to hold their business ventures.
What are the downsides to using a corporation?
There is a substantial amount of expense associated with starting and maintaining a corporation. Beyond paying annually for a tax return, you will also need to complete an annual report (which can vary on a state by state basis). There are also a number of rules and regulations that you need to adhere to on an ongoing basis including holding formal board meetings, maintaining the minutes of these meetings, and preparing substantial amounts of paperwork that need to be provided to shareholders. Of course, if you are the sole owner of the corporate entity that holds the assets of your boutique then this process can be done at less cost. One of the other complications that often arise is when dissolution occurs. This is a lengthy process that can require several months to a year to complete.
What will I need when establishing a corporation or limited liability company?
Generally, you will need to provide the following when you are establishing a new corporate entity:
- Business Name
- The business’ street address
- Name of the incorporator
- Names of the business owners
It should be noted that in some states, certain declarations are included as part of the corporate charter. You can check with you state’s department of state to determine what types of language can be included. If this is something that you are not familiar with then you can use an attorney or incorporation service to help guide you through this process.
Do I need a registered agent?
In most cases you do not need to use a registered agent when you are creating a domestic corporation or limited liability company. Many entrepreneurs can act as their own registered agent by using their home address or by using a private mailbox service. It should be noted that you will generally be required to use an actual street address for your corporate entity. One of the reasons why registered agents are popular is because you will not need to use your home address as the business. For many people, they want to keep their professional lives separate from their home lives. The cost of using a registered agent service typically ranges from $50 to $100 per year in most states. If you are going to register your corporate entity in a different state from which you reside, you will most likely need to use a registered agent service.
Will I face issues regarding securities laws?
This only applies to people that are raising capital from private third parties. If you are going to create a corporation for this purpose then you should definitely retain both an attorney as well as a CPA that can assist you with addressing any issues that surface as you secure capital to start your online boutique. We have an article specific for raising capital from private investors on this platform that showcases certain matters that you should become aware of when going down that road.
Will I need to file a separate form for a DBA?
This varies state by state. In some cases, your “doing business as” name can be included when you incorporate the business. You will need to take a look at your state’s incorporation portal to see if additional forms are necessary for this purpose.
Conclusion
In closing, making the appropriate determination of what corporate entity best suits your needs is a complicated decision. It will have an impact on how your business operates as well as your personal tax returns. Again, and not to sound like a broken record, it may be in your best interest to have a quick consult with a CPA or tax attorney that can review your personal financial situation in order to determine which corporate entity is most appropriate.
Once you determine the appropriate structure for your business and complete the incorporation then the rest of your business development will go very quickly. Although this seems very complicated, it is front loaded work. You and your CPA will quickly get into a routine as it relates to the necessary quarterly and annual tax filings that you will need to complete regardless of the type of corporate entity you chose for your boutique.