You’ve finally decided to go into the coaching business. Through hours and hours of research, you picked your niche, picked your target market, and decided what products or services you will be offering through your coaching. Now it’s time for the fun stuff!
Oh, wait… Business legalities and government jargon? Taxes? This doesn’t sound fun at all.
You’re right. It is a nightmare for most people (it was for me at first). In fact, it’s not fun at all… if you don’t understand how it all works.
But if you know a couple little tips and tricks when it comes to understanding how business entities work, you can use them to your advantage. Oh and trust me… once you discover the loopholes and tax advantages, this information could be worth tens (if not hundreds) of thousands to you.
Here are the advantages and disadvantages of each of the three main business entities:
1) Sole Proprietorship
A sole proprietorship is the most popular of the three main business entities in the United States. Making up 73% of small businesses in America, it is easily the most common. A sole proprietorship is the one person show. It’s when someone owns a business and runs the business entirely by themselves.
It is the easiest business structure to understand. To start a sole proprietorship, you don’t need to do any formal activity to establish yourself as one. Since you are the owner of the business, you are the sole proprietor. For instance, a coach who works alone is a sole proprietor. This business entity is not incorporated. If you choose to pursue an LLC (even if you are still the only one operating the business), you are no longer classified as a sole proprietorship.
Regarding taxes, you are the business and the business is you. You are taxed as a business. All you need is a Standard Form 1040 and a Schedule C.
The advantages:
- Autonomy, control, flexibility to do whatever you want in your business (as long as it is legal of course!). You are the boss.
- Creditors are more inclined to extend more credit because liability is unlimited
- No partners. You keep the profits.
- Easier to manage and organize – fewer people (just you) and less capital means fewer worries
The disadvantages:
- You are liable as a person for any debts the business owes
- Receiving loans from the bank is a harder battle to win as a sole proprietor since you are working with less capital and often fewer assets
- Owe money and can’t pay? If your business assets don’t cover the bill, creditors can hunt down your personal assets and money and dive right to satisfy a legal claim
- It’s harder to raise money over the long term since it is a one person show
2) Limited Liability Corporation (LLC)
This entity is full of options when it comes to your business’ needs. Due to the limited liability features of a corporation and benefit of income taxation (instead of being taxed separately, business income is represented as a portion of the owner’s personal income).
The advantages:
- You have many options when it comes to taxation. You can choose between filing your taxes as a sole proprietor, partnership, S Corporation or C Corporation.
- Less expensive filing costs, and less filing to be done
- You can choose to form an LLC with multiple people or by yourself
- The simplicity of flow-through income taxation
- If there are legal or debt problems that arise, the members of the LLC are protected from a portion of (or all of) the liability
- LLC members declare revenues that are bigger than their percentage of ownership as an individual
The disadvantages:
- You can not pay yourself a wage as an LLC member
- Depending on your state, renewal fees and requirements for publication can be high
- Also, depending on your state, there may be a franchise or capital values tax on LLC’s (this can be based on company revenue or simply a flat fee)
- It can be more difficult to raise funds for an LLC as investors are more prone to give towards corporations
- The ownership of the LLC is split up among members, which means less control
3) S Corporation
An S Corp (S Corporation) is a little more complicated than a sole proprietorship or LLC, but if used correctly, can be the most beneficial for your business. An S Corporation is a business entity that is federally taxed differently than the previous two entities. The IRS taxes it as a pass-through entity. This may sound complicated now, but it is actually quite simple.
You see, an S Corporation gives stock (ownership) out to shareholders. The shareholders are the owners of the corporation. The owners (shareholders) are protected from liability as if they were an incorporated business. In layman’s terms, if something really bad happens like major legal issues or debt problems, the owner’s are not personally liable. Their personal bank accounts, assets, and resources can’t be touched.
The S Corporation is different from a sole proprietorship, though they have a few similarities. Each owner (shareholder) has their own personal tax rates. Plus, a big bonus is that they only get taxed once. They don’t get taxed on the personal and corporate levels.
S Corporations don’t pay taxes like corporations. In fact, individual owners report their personal earnings on their personal tax returns. The S Corporation isn’t charged federal taxes, which means a higher chance for big tax savings. The S Corporation operates distinctly separate from a person (unlike a sole proprietorship). Also, if you have an LLC, you can submit a request S Corporation status (which can be done by contacting the IRS, using Form 2553). This means that you would still have an LLC, but it would act as an S Corporation when it comes to doing taxes.
When used correctly, the S Corporation can be the most advantageous of the three legal business entities.
Advantages:
- Your assets are protected – if there are any issues with company finances, taxes, or debt, your personal bank accounts and assets are protected
- Pass-through taxation – S Corporations don’t pay taxes like a corporation – personal shareholders report their individual incomes on their taxes (this can be very beneficial at the first few years of business when profit is much lower)
- Ownership to new shareholders is easy – If you decide to sell your ownership, or pass your shares to someone else, it is very simple
- Business authority and trust – S Corporations are more trusted than sole proprietorships or partnerships to potential employees, investors, and clients
Disadvantages:
- Forming the S Corporation initially (more paperwork is required)
- Restrictions with stock – due to tax laws with the pass-through capabilities, there are laws in place limiting “getting rich quick” with stocks
- Tax scrutiny – Messing up on your taxes with an S Corporation could result in it being stripped away. The IRS is a bit more nosy when it comes to making sure S Corporations are doing things “by the books”
- Shifting income and loss is harder – Shareholders in an S Corporation don’t have a ton of flexibility when it comes to shifting income and losses
Whether you’re thinking about starting your coaching business, or you’re all ready to choose your business entity, it’s important to know the pros and cons to each one before taking the plunge, especially if you are planning to scale up your business one day and hire a few employees. Use this information as a reference.
For more information on the “fun stuff” and before you take any big steps with your business, be sure to seek legal advice and tax advice from a lawyer and accountant. It’s never a bad idea to have some professionals look over your business plans before you begin.
If you are not yet a coach or want to learn additional coaching methods, review the entire list of certification training programs.
It’s that simple!
The NESTA/Spencer Institute Team
https://nestacertified.com
https://spencerinstitute.com
