In my recent travels along the Pennsylvania wine trail, I met an entrepreneurial minded young lady who expressed an interest in forming a “wine-tasting business”. We briefly explored her need to create the right business structure. Thus, I thought I would discuss the various business structures for those of you who are considering opening your own winery, restaurant, catering, event planning, bed and breakfast or hospitality business. The type of business structure you choose is determinative of the personal liability and tax consequences you will face. You will need to consider the amount of control you wish to have as well as your business exposure to lawsuits.
There are advantages and disadvantages to each form of legal business structure. The different types of business entities include: Sole Proprietorship, Partnership, Corporations, and Limited Liability Company. I will discuss the differences in these legal structures in a series of several posts. As you consider starting your own wine or hospitality based business, think about how you want your business to be structured. In today’s post, I will begin with the Sole Proprietorship.
The most simple of business structure is the sole proprietorship. There are no multiple owners in this form of business structure. The sole proprietorship is the easiest and least expensive business structure to operate. In this type of business formation you are in sole control of the management of your business. This is one of the advantages of operating as a sole proprietorship. There are no organizing documents to be filed with the State. First, name your business. You should determine that the name you select is available for use and that you are entitled to use it. Any sole proprietorship conducting business under a fictitious name (a name other than your own) must register this name with the Pennsylvania Department of State Corporation Bureau. In the Commonwealth of Pennsylvania if you operate your sole proprietorship under a name other than your own, you are required to publish an advertisement in two newspapers in the county where your business is located. You must state that you have filed or intend to file a fictitious business name registration. While you are not required to do so, you may want to give consideration to registering your business name as a federal and or state trademark.
Every business subject to employment taxes is required to have a Federal Employer Identification Number (EIN) to identify the business with the Internal Revenue Service (IRS) and Social Security Administration (SSA). You may apply for an EIN even if you have no employees. This will make it easier for you to establish your business’s bank accounts. You should preferably keep your business finances and record-keeping separate from your personal accounts.
While the sole proprietorship is the simplest form of legal structure, do not sleep on your obligations. As a sole proprietor, you can personally be held liable for all financial obligations of the business. This also includes any unlawful acts of your employees. You ask, what does this mean? It means that if you don’t pay your suppliers, fail to pay your creditors, or you lose a lawsuit, then the business (which is you) has to pay. If you fail to pay, your creditors could legally come after your home or your possessions.
Tax filing for the sole proprietorship has easy reporting requirements. Legally, the sole proprietor is not separate from the individual who owns it. Business income or losses are reportable through the IRS Tax Form 1040, Schedule C with the sole proprietor’s personal income tax return. Sole proprietorships avoid double taxation often associated with certain corporations.
You should ensure that you have all licenses or permits required to operate your business as most counties or cities require sole proprietorships to obtain local zoning, seller’s permits or business license and tax registration certificates.
In the next post of this series, we’ll consider the other forms of business structures. What wine or hospitality business are you creating?