Choosing A Business Structure For Your Painting Business
When starting a new painting business, one of the first steps to take, often before even choosing a name, is selecting a business structure. The four basics business entities most commonly used are sole proprietorship, partnership, LLC (Limited Liability Company), and Corporation. If you have already worked through a business plan for your painting business, the future goals you have may help you decide on what structure you will register with. Below you will find a description of each type of structure and the benefits of each to your new painting business.
A sole proprietorship is the most basic of business structures. Most painter will start out as sole proprietors. In most regions, you may have to register a DBA (doing business as) name, but you may not have to register as a sole proprietor. You will still need licenses, permits, and tax registration as required by your government agencies.
A sole proprietorship is a business run solely by the business owner. The business owner is connected to the business one hundred percent. As a sole proprietor, you will get all the profits from your painting business, but are also responsible for any losses, debts, or legal action taken against the company.
As a new painting business with one owner, you can start your business immediately (after proper government registration) as a sole proprietor. You will be fully responsible for any losses incurred by your business. Liability insurance can help protect the loss of business assets, but not your personal assets.
A partnership is a business where the ownership is shared by at least two people. While the profits are shared, the losses, debt, and responsibility for any legal action taken against the business are also shared.
If you decide to have a partner with your painting business, you will need to decide together how the business will be run, and how the profits will be shared. You may want to create a legal partnership agreement to provide clarity in case arguments and misunderstandings regarding the business arise. You may want to include in the partnership agreement terms for the process of one or more partners leaving the business.
There are three types of partnerships in the United States: General, Limited, and Joint Ventures.
A general partnership has each partner sharing responsibilities, profits, and losses for the business equally, unless specified otherwise in the partnership agreement.
A limited partnership allows partners to have limited liability in the business, and limited input on business decisions based on the partners investment in the company.
A joint venture is similar to a general partnership, but on a short-term basis. If the parties involved decide to continue long-term, they can then file as a general partnership.
As a painting business owner in a partnership, be aware that all profits will be shared with the other partners, and any losses caused by the other partners will be shared with you. Disagreements between partners can cause friction in the business, possibly causing the business to dissolve.
Limited Liability Company (LLC)
While an LLC is a mixture of a Corporation and a Partnership, it can still be registered by one owner. An LLC can consist of many owners or “members”, and provide limited liability protection similar to that of a corporation.
If you choose an LLC, you must have the initials “LLC” in your registered painting business name.
LLC’s are popular with painters, home improvement companies and many other types of businesses as they help protect the owner’s personal assets in the event of a lawsuit or if your handyman business takes on debt.
While there are some registration costs when forming an LLC, the costs are less than when forming a corporation. There is also easier registration requirements.
Corporations are more complex business structures. A Corporation is generally owned by shareholders. The Corporation is responsible for legal issues and/or debt the company incurs, not the shareholders. There are two types of Corporations: a C Corp and an S Corp. A C Corp is referred to generally as a Corporation, while an S Corp is structured slightly differently.
Corporations cost more money and take more paperwork to start and maintain. They are generally a better choice for larger companies. Corporations also have the opportunity to offer stock.
The taxes for a Corporation (C Corp) are paid out of the Corporation.
An S Corp is similar to a corporation, except the taxes are paid through a personal tax return.
Unless you are starting a large painting company right away, you probably don’t need to consider choosing a corporation as your business structure at this point.