Setting Up Your Business Entity: A Guide for New Contractors

Business entities diagram

HomeAdvisor offers advice on setting up a business entity for new contractors. The more formal the business structure, the more likely a contractor will be considered independent and less susceptible to a claim of misclassification.

Determining the Right Business Structure for Your Contracting Business

There are several business structures to choose from, and the structure you choose impacts how you file your taxes and other aspects of your general accounting and record-keeping. But there is no single best business structure for contracting companies. The following resources will help you determine the best business structure for your new business needs.

There are various legal and tax implications for different business structures. The Small Business Administration outlines the various business structures and the specific implications of each choice. Business entities include a Sole Proprietorship, Limited Liability Company, Corporation, Partnership, and others.

The structure that makes the most sense depends on the individual circumstances of each business owner. This article from Entrepreneur explains the types of business entities and the legal and tax benefits (or downsides) of each.

The right business structure “depends on the type of business you run, how many owners it has, and its financial situation.” According to this article from NOLO.com, “No one choice suits every business: Business owners have to pick the structure that best meets their needs.” Factors to consider include the potential risks and liabilities of your business, the formalities and expenses involved in setting up and maintaining various business structures, your income tax situation, and your investment needs.

In most instances, a new business is set up as a limited liability company (LLC), a partnership, a corporation or a sole proprietorship. This article from FindLaw describes the various criteria to consider including varied liabilities, expenses and procedures, income taxes, and investment needs.

Liability, taxation, and record keeping are the key differentiators between business structures.The Internal Revenue Service (IRS) explains the differences between the various types of business entities. Additionally, this page offers links to more detailed tax reporting requirements for each type of business structure.

The LLC is a popular choice for contractors, but there really is no one-size-fits-all ideal business entity for contracting businesses. This article describes the pros and cons of each business entity within the context of contracting companies.

When in doubt, consult an attorney or a CPA for advice on the best business structure to suit your unique needs. These professionals can aid in setting up formal business entities and can help you understand the various record-keeping and reporting requirements required for each.

Read the full story at Setting Up Your Business Entity: A Guide for New Contractors

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