Doula Business Entity Types: One Size Does Not Fit All

Business Entity Types One Size Does Not Fit AllYou have a passion and the talent to help families have the birth they desire so you decide to start a business. Now what? Wouldn't it be easy if you could choose a business name, have business cards printed, and just get to work? Unfortunately, there are a few more decisions you will need to make. We, as business owners, must decide what type of business entity we would like to form. The type of business entity you choose is one of the most important decisions you will make when starting your business. While bookkeeping is the same for each entity, there are some legal and tax differences to consider.

Before we get started, I would like to make you aware of the fact that I am not an attorney or tax expert so I will just cover a basic overview of each entity type and the factors you should consider when choosing a business entity. Because laws vary by state, you should contact a legal and tax professional in your state to discuss your state's business laws and options in detail.

The Four Main Types of Businesses

There are four main types of business entities: a sole proprietorship, a partnership, a corporation, and a limited liability company.

Sole Proprietorship

A sole proprietorship is the simplest to form and operate and the most common of all the entities. It is not considered a separate legal entity from the owner. A sole proprietor is not required to hold annual meetings or record meeting minutes. A separate business tax return is not required to be filed but rather, owners report business profit and loss on their personal tax return. No state filing is required to form a sole proprietorship but some counties may require a form to be filed. Perhaps the biggest downside of a sole proprietorship is the lack of legal protection. The owner is personally liable for lawsuits filed against the business. Although the lack of legal protection might keep some business owners from choosing this business type, many sole proprietors still choose this option along with a good umbrella insurance policy.

Partnership

A partnership is similar to a sole proprietorship but involves two or more people or organizations who agree to share profit and loss. It is the only entity that can be formed by an oral agreement. Like a sole proprietorship, a partnership is not required to hold annual meetings or record meeting minutes, and no state filing is required to form but some counties may require a form to be filed. While owners report business profit and loss on their personal tax return, a separate business tax return will need to be filed. Again, the downside is that owners are personally liable for lawsuits filed against the business, but a good umbrella insurance policy can help mitigate some of the risks.

Birth Business Entity Chart - Compare Sole Proprietorship, Partnership, Corporation and Limited Liability Company

S Corporation and C Corporation

A corporation is a legal entity that is created to conduct business. It is more complex and expensive to form and operate than most other business structures. A corporation provides an independent legal structure separate from the owners, and therefore the assets of the owners are protected. The corporation must file its own tax return as well as hold annual meetings and record meeting minutes. There are two types of corporations: a C corporation and an S corporation. Whether the tax is paid by the corporation or by the owner on the owner's personal tax return will depend on the type of corporation you choose. The downside of a corporation is the cost to form and the extensive record keeping that's required as well as higher accounting and tax preparation fees.

Limited Liability Corporation

A limited liability corporation (LLC) is a hybrid between a partnership and corporation. The LLC is an independent legal structure that is separate from its owners which allows for personal liability protection. Owners are not required to hold annual meetings or record meeting minutes. An LLC is taxed much like a sole proprietorship if the business has a single owner and like a partnership, if the business has multiple owners or the LLC can choose to be taxed as an S corporation. One of the downsides to an LLC is the cost of formation. While many suggest becoming an LLC, there are seven states (Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas) that levy franchise tax on LLCs which may make this type of entity cost prohibitive.

The Four Main Factors to Consider

The type of business entity you choose will depend on four factors: legal liability, tax implications, the cost of formation and ongoing administration, and the future needs of the business.

Legal Liability

First, you should consider to what extent you need to be protected from legal liability. Does your business lend itself to potential liability and can you personally afford the risk of that liability? The number one reason business owners incorporate their business is to protect their personal assets. While many unincorporated businesses can be protected by an umbrella insurance policy, forming a corporation is the only guaranteed way no one can seize your personal assets in case of a lawsuit against your business.

Tax Implications

Next, you should think through the tax implications of each entity. A sole proprietorship does not receive any tax savings options but it is not required to file its own tax return. On the other hand, there are many more tax options and discounts available to corporations but double taxation can be a downside of a corporation (this can be avoided be forming an S corporation).

Formation and Ongoing Administration Costs

Then, consider the cost of formation and ongoing administration costs. These costs may mitigate the tax advantages that corporations receive. Often the high cost of incorporation and extensive record-keeping is what causes many business owners to choose a sole proprietorship. The more tax returns you are required to file (personal and business) the more you will pay your tax professional. Unless you are benefiting from tax implications or protection from liability, the high cost of forming and maintaining a corporation might not be worth it.

Future Needs of Your Business

Finally, you should consider is the future needs of the company. When you first start your business you often aren't thinking about what your business might look like five or ten years down the road. What will happen to the business after you retire or if you should die while you own the business? What if after a few years you want to sell your part of a business partnership? Do you want to be able to sell stock to raise capital for the business? Also, keep in mind that the business structure you start out as may not meet your needs in years to come. Many businesses start as sole proprietorships and evolve into some other type of entity as the business grows and as the needs of the business change. If you do choose to start as a sole proprietor, I would recommend you acquire an Employer Identification Number (EIN) number from the IRS. Sole Proprietors are not required to obtain an EIN but having one will keep you from having to give out your personal social security number (SSN) for business dealings.

In short, choosing a business entity should not be taken lightly and you shouldn't make a choice based on what someone else has done. Carefully consider the unique needs of your business and seek expert advice before settling on a business type. No matter which type of entity you choose, it's important to keep your business and personal finances separate. You should have a separate bank account and credit card for the business. You also need a good way to keep up with your business expenses. When tax time rolls around you will be glad you took the time throughout the year to keep good records! If you want more information on keeping your business finances separate, I recently wrote a blog post titled, The Importance of Keeping Business and Personal Finances Separate.  I'd also like to make you aware of the opportunity to sign up for my newsletter. You will periodically receive updates and bonuses delivered straight to your inbox. Plus, you will receive a FREE copy of my new report – 7 Bookkeeping Mistakes Birth Professionals Make and How to Fix Them. You can read my blog and sign up for my newsletter at www.thebirthbookkeeper.com.


Kimberly Blakey - TheBirthBookkeeper.com

 

Kimberly is a native Texan and the owner of Radiance Bookkeeping, a virtual bookkeeping service for birth professionals nationwide. Radiance Bookkeeping was born from a passion to support birth professionals as they support the families they serve. Kimberly considers herself a faux foodie and when she isn't crunching numbers, she enjoys trying new restaurants and traveling with her family.


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