One of the questions I hear a lot is: if I create a business, how do I legally get it started. To the government, there are several different business types you can use to create a business. They say that here in the United States at least, and Canada as well, it’s extremely easy to start a business. You just print up business cards and boom, you’re in business, and to a certain extent, that’s true.
What you want to do, though, is to protect your assets. Our government has given us these sort of vehicles, per se, that you can get into which will then separate the business as an entity from you personally.
If you’re out there mowing grass and you run over somebody’s pet cat, you’re liable for that cat. Now, chances are it might not be worth very much, but it could be though, and it’s certainly a painful experience. But they will come at you, and they will say, “Fred, why did you run over my cat? You need to pay whatever damages are.”
What the government has given us is the opportunity to create these things called corporations. There are several different ones, and that protects you because what this will do is they create this entity, in our case called CLIP Lawn Care, that exists out there. If CLIP Lawn Care as an entity were to do damage or get sued or something like that it’s not Dave Tucker, it’s CLIP Lawn Care. So, the assets that CLIP Lawn Care has are subject to that lien or that judgment or whatever might come down on it. Those assets would be some trucks and some mowers and some trimmers and things along those lines. That’s why having a corporation helps.
The Governement Lists 5 Different Business Types
C Corp is the biggest of the business types, but you probably won’t need to start with that. You can always move into a C Corp if you have to. Another one is called an S Corp, and an S Corp is a smaller entity. There’s a limit on how many stockholders you can have with this classification. It’s still quite a few hundred or so.
The S Corp business type has a direct flow through. They call it flow through because if the company makes $10,000, that flows onto your 1040 and the government then considers that you made those $10,000 and you are now liable for the taxes on that amount. That’s why a lot of businesses will do what’s called minimizing the profit. They’ll do everything they can to make their profits look bad at the end of the year because you’re going to have to pay personal taxes on that money.
Then you have LLC’s, limited liability corporations, which are similar to the S Corp. The money still flows through, and any profits or loss flows right down to your 1040 form, but they’re also limited.
The last two business types you can have are a partnership or sole ownership. The sole ownership is the riskiest because that’s the one where you’re mowing the grass, and you break the window or kill the cat, and you’re liable. You really should look at the different options and be sure to involve your CPA.
Legal Protections of Corporations
You could also use something like Legal Zoom. It isn’t costly, and it’s not that hard. It’s a little bit of paperwork to set up your S corp or your LLC. Once you set that up, you’ll get some papers, and it’ll say you are official. You’ll receive what’s called an FEI, a federal employment identification number. It’s sort of like a social security number, but it’s for your entity.
Once you have that, you can then do payroll. You can also register your vehicles in the name of that corporation instead of in your name. You can buy the lawnmowers through the corporation instead of you buying them and that sort of thing. It is a good idea to do that, but whether or not you have to do that right up front depends on how many personal assets you have.
If you’re in your 40s and you’re starting this as your second thing, you already own your house, and you own cars and stuff like that, then set it up before you do any work. If you’re just a young person coming out of high school and you want to start this up, and you have no assets then you could wait a little while before you did it. But, you want to get it done relatively soon. Like I mentioned before, it’s not very expensive.
So decide what you want to be. My recommendation is that you would most likely go with an LLC or a partnership, maybe even an S corporation. But, get that down first and then start doing your work. That way, you know you’re protected.