Marcus Best Business Marcus\' Graphic

Marcus

Best Business

Marcus' graphic design company: The advantages of beginning his enterprise as an LLC

As a single individual starting a graphic design business, the most obvious options available to Marcus are to begin his enterprise as a sole proprietorship or to instead create a limited liability company (LLC). A new entrepreneur is naturally cost-conscious, thus Marcus may at first be attracted to the ease of opening a sole proprietorship (Sole proprietorship, 2009, Residual Rewards). He would not be unusual in this sentiment: 75% of all businesses in America are sole proprietorships. The advantages of this entity type are that it is the easiest and least expensive form of organization to create, legally speaking. Also, it does not require knowledge of complicated accounting techniques to maintain as he "profits from the business flow-through directly to the owner's personal tax return" (Sole proprietorship, 2009, Residual Rewards).

A sole proprietorship's tax status is one of the primary arguments in favor of such an entity selection for Marcus: unlike a corporation, which is regarded as a fictional 'person' for legal and taxation purposes, an owner of a sole proprietorship is only taxed once, on his or her own tax returns. Marcus can do the taxes for his business as part of his regular annual personal income tax form. If Marcus incorporated, his own income would be taxed, as well as the profits from the corporation he began. Given the initial size of the operation, and the fact that Marcus expects to gain most of his income from his own business, incorporation would seem to have more financial disadvantages than advantages

Additionally, as opposed to corporations, sole proprietors are in complete control of the operations of their company. A creative person like Marcus will value the ability to make all of the decisions about his business, especially as he is only just beginning to define its character. Finally, "sole proprietors receive all income generated by the business to keep or reinvest" and the profits are not dispersed to shareholders (Sole proprietorship, 2009, Residual Rewards). If Marcus tires of working alone and wishes to seek employment with a larger organization, a sole proprietorship is easy to dissolve. Dissolving corporations require complicated legal procedures to ensure shareholders, bondholders, employees, and owners all receive appropriate compensation.

The problem with a sole proprietorship is that as a sole proprietor, Marcus will be financially liable for all of the losses and potential failure of his company, a very real possibility given the high failure rate for most new businesses, regardless of the economy. His personal as well as his professional assets are at risk if he falls into debt because of his business' failure to thrive. And in these credit-strapped times, he "may be at a disadvantage in raising funds" as sole proprietors cannot issue bonds or sell shares of stock -- they are "often limited to using funds from personal savings or consumer loans" (Sole proprietorship, 2009, Residual Rewards).

Even in terms of his tax returns, the law does not always favor sole proprietorships: some employee benefits such as owner's medical insurance premiums are not directly deductible from business income and are "only partially deductible as an adjustment to income" (Sole proprietorship, 2009, Residual Rewards). There are also different rates of taxation for the two entity types: "a corporation pays 15% federal income tax on taxable income up to $50,000; 25% tax on income from $50,001 - $75,000; 34% tax on income from $75,001 - $100,000; 39% tax on income from $100,001 - $335,000; and 34% tax on income over $335,000" while a married sole proprietor "would pay 15% federal income tax on taxable income up to $35,800; 28% tax on income from $35,801 to 86,500; and 31% tax on income over $86,501" (Sole proprietorship, 2009, Residual Rewards).

But, Marcus wails, I don't want to be liable for my business' debts, yet I have no prospective business partners! Also, I am not large enough to incorporate, nor would I want to lose that control over my business to shareholders! There is a solution: a limited liability company (LLC). This is a relatively new type of "hybrid business structure" that provides the limited liability features of a corporation but the tax status and flexibility of a proprietorship (Sole proprietorship, 2009, Residual Rewards). "The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration" (Sole proprietorship, 2009, Residual Rewards).