When you apply for a license, you are required to register for a specific business organization with the “Division of Commerce and Corporations”.
Most contracting businesses are organized as sole proprietorship partnerships, “S” corporations, corporations or limited liability companies. Each one has pros and cons and as a contractor, it’s your responsibility to educate yourself and choose which type of business is best for you. Sole proprietorship is a business owned, operated and managed by one individual. Under this type of business organization, the owner has all of his/her personal assets exposed to creditors in business, which means all profits and debts belong to the owner and are to be reported on the owner’s personal tax returns at the rate of approximately 15% in addition to the required federal and state taxes.
And although this type of organization has risks, it’s the easiest to set up and manage and the least expensive to form. The second type of business organization you can register is under a partnership. A partnership is similar to a sole proprietorship except that there is more than one individual involved. Each partner(s) contributes cash, property and services to the business and each are personally liable for the debts of the business. It can be as formal or informal as you decide, but without a written agreement it could be difficult to enforce a partner’s rights or ownership interest.
The third type is under a corporation, which are legal entities created by the state which are separate and apart from its owners. If the corporation is managed correctly, the corporation is responsible for its own debts, as opposed to the individual shareholders. The most significant attribute of a corporation is its ability to shield its owners from personal liability and its everlasting life, so regardless of what other shareholders are contributing or undergoing, your role in the corporation is independent. One drawback is the double tax requirement on dividends.
An “S” corporation, unlike the corporation mentioned above, avoids double taxation, so the profits or losses pass through to the owners which are to be reported on their personal tax return. Whichever corporation you choose to register under, you must maintain certain corporate formalities in order to protect your personal assets, such as maintaining corporate records of the directors, officers and/or shareholders. The last type of organization you may register under is the “LLC” or Limited Liability Company. The owners of this type of company are called members and actively participate in the management of the business without becoming liable for the debts of the business. If a member wants to sell his or her shares, it must be approved by the other members.