How to Start a Business Part II (In Colorado)

Well, I took those SBA courses.  The “legal requirements for small business” seemed pretty useful.  The most salient point to me, which I hadn’t realized was that getting set up for sales taxes looks like a pain.  I don’t believe that sales tax will have to be charged on a tutoring business, but this is a really easy thing to forget if your current experience selling stuff simply involves eBay.

Step 3: Choose a location

This is fortunately a simple step for me.  I’ll be operating entirely at a location determined at the time of tutoring.  For you this may not be so simple.  Unfortunately, it’s an area I have little knowledge about, but if anyone out there would like to chime in, well, I guess I’d just find it pretty darn helpful.

Step 4: Finance Your Business

The rules for financing a business seem quite complicated.  I’ve read a very useful article that seem to indicate that raising funding by selling shares of the business could cause trouble with the SEC (seriously read it, its super interesting).  The SBA website seems to largely concentrate on loan products that it offers.  Today, given a prototype product, one can always look into using Kickstarter or GoFundMe.  Fortunately, my hypothetical business doesn’t require a great deal of funding.

Step 5: Determine the legal structure of your business

There are basically five different ways to organize a business in a legal sense:

1. Sole Proprietorship
   • If you don’t incorporate the business, then this is you.  You will be personally liable for the business’s debts and actions. In other words, “Quantum Tutors” gets sued or goes bankrupt I’m on the hook.  The advantage here is that filing taxes is as simple as it gets.  You just pay taxes on your profits, though you have to make sure that you also pay the “self employment tax“.  The simplicity has to be weighed against the possible liability.
2. Partnership
   • If you have a partner you can’t do a sole proprietorship, but this is basically the sole-proprietorship for when you’re no longer sole-o (pronounced: solo) (I’m pretty sure this doesn’t even really qualify as a joke).  You do have to additionally file 1065 (return of partnership income).  This just tells the government how much money the partnership made.  You also need to send partners a form (called a K-1) that tells them how much money they made, so that they can appropriately calculate the taxes they owe on those profits. General partners (people who manage the business) are liable for the business’s debts and actions.  Limited partners (if it’s a limited partnership) are not liable.
3. Corporation (C-Corporation)
   • This is the first type of business where profits aren’t simply passed through to the owners for taxation.  Here the business calculates its profits, then pays taxes (a progressivish tax that moves from 15 to 39% and then mysteriously settles in on 35%) on those profits to the IRS.  When the corporation then pays those profits out (called a dividend) to owners (called shareholders) the shareholders have to pay an additional tax on the dividend.  So needless to say, this seems just terrible.  It does provide liability protection however.
4. S Corporation
   • If you meet certain requirements (easy ones for a small business to make) like being a domestic corporation and having less than 100 shareholders. The benefit is that this structure passes losses and profits through to you for paying taxes on (no double taxation!) and also provides liability protection.  The S Corp is a legally distinct entity from you.
5. Limited Liability Company (…or So That’s What LLC Stands For!)
   • The rules for this vary from state to state, but the important bits for me are that it is quite similar to the s-corp in terms of the ability to pass through taxes (though this can vary from state to state) and also does what it says on the tin. (Limits liability for those of you too scared/wise to click on a tvtropes link)

For my tutoring business I will certainly go with a Sole Proprietorship as all of the other structures simply have advantages that aren’t important for the sort of business I’m starting.  Anyone else working on a business?  Have you gotten stuck anywhere in the process?  Think of any uses of a C corp that a small business might actually care about?