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Volume 13
March 2009
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| Greetings!
The Ides of March are upon us ... and so are those dreaded tax-filing deadlines. What perfect timing to delve into the tax structure of your cleaning company.
Perhaps your cleaning company is a small operation and you are content with the simplicity of being a sole proprietor. But before you stick to that status for another year, you should weigh the tax advantages and liability protection of a corporation or limited liability company (LLC).
This month's feature article examines the advantages and disadvantages of one of the most popular legal structures among small to mid-sized cleaning companies: the LLC. Learn more about how LLcs compare to corporations and sole proprietorships in our side bar, Just the Facts.
Disclaimer: You should always discuss your options with an accountant or licensed tax professional. State laws vary widely, making some structures more advantageous in one state than in another.
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The Pros & Cons of Limited Liability Companies
 If you are launching a new cleaning company or if you are expanding your current operations, you may be wondering if it is time to move beyond sole proprietorship. One of the most popular legal structures for small, start-up businesses is the LLC or Limited Liability Company.
An LLC is a business ownership structure that combines aspects of sole proprietorships, partnerships and corporations. LLCs are fairly easy to set up and require minimal paperwork through the year. To form your LLC, you will need to:
* File your company's Articles of Organization with the Secretary of State. You can prepare the articles yourself, or you can hire an attorney or an online service to do it for you. This website has templates for each state, which you can download for free. Your state will assess a fee when you file the Articles of Organization. Each state sets its own fees, which range from just $40 in Kentucky to $500+ in Illinois. You can file your Articles at any point in the year, although LLC status may not be retroactive to the beginning of the year. If you are single member LLC, you will not need to file two returns. If you elect "S" status, you may need to file separate returns.
* Draft an Operating Agreement. Not all states require you to have an operating agreement, but even if you aren't legally obligated to do so, it's a good idea nonetheless -- especially if you open your company with partners. The document can outline your agreed-upon profit distribution arrangement, division of responsibilities, and any other partnership issues.
While each state has its own rules regulating LLC formation, operations are generally the same across the United States. Here is an in-depth look at the advantages and disadvantage of operating your cleaning company as an LLC.
Advantages of Limited Liability Company
Limited liability
This is the biggest plus of an LLC and the reason why so many small business owners choose it. Owners of an LLC (referred to in accounting lingo as members) cannot be held personally liable for their company's debts, unless they have signed a personal guarantee. Additionally, their personal assets cannot be attached in the event of a lawsuit.
Minimal red tape
Another huge plus of an LLC, particularly when compared to a corporation, is that paperwork is minimal. You don't have to keep formal minutes, hold formal meetings, or record formal resolutions -- all of which are required of corporations. There is also less paperwork required to set up an LLC, and your yearly taxes are generally simpler to file than with a corporation.
No double taxation
Your losses, profits and expenses flow through the company to the members (known as flow-through taxation), so you don't have to worry about double taxation. Owners of corporations, on the other hand, can face both corporate tax and individual tax.
Profit Distribution Flexibility
With a common partnership, all profits must be split 50/50, but with an LLC, you can select varying forms of profit distribution. If you are the sole owner (i.e. member) of your LLC, then this point won't make much of a difference to you. But if you own the company together with a partner(s), you may want to pay one partner a greater percentage of profits than another. Why would you want to do that? Maybe one partner works at the business 50 hours a week, while the other only contributes 20 hours a week. Or perhaps one partner put up all the initial capital. If your partnership isn't exactly 50/50, then you may not want your profits to be either.
No unemployment tax
Unlike corporations, LLCs are not required to pay unemployment tax or worker's compensation on income paid to members (i.e. owners). And you will, of course, still be required to cover these benefits and taxes for your employees.
Tax filing simplicity
If you are the sole owner of your LLC, doing your annual taxes should be a cinch -- you just file the 1040 Form with the IRS. If you form a partnership LLC, you must file partnership returns with the 1065 Form, which, while more complicated than the 1040, is still far simpler than corporate taxes.
If you decide to retain some of your earnings, you may prefer to be taxed as a corporation. The tax rate on retained earnings is significantly lower for corporations than for sole proprietors or simple partnerships. For your LLC to be treated as a corporation, you must file the 8832 Form with the IRS.
Disadvantages of Limited Liability Company
Limitation on Business Losses
Since an LLC, by definition, limits your personal liability, you may not be able to deduct business losses from your income. If you anticipate losses (which is fairly common in the first few years of operation for a small business), you may be better served by incorporating your business. To assess the short- and long-terms costs and savings of LLC status vs. corporation status, consult with a licensed tax professional.
Taxation
Taxation is on both lists, since how much you benefit depends on whether you company has gains or losses (see above) and on the regulations of your individual state. Some states assess additional taxes on LLCs. In California, for example, LLCs are charged a "franchise tax" if they earn more than $250,000 a year.
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The benefits of simplicity, limited liability, and flow-through taxation make the LLC a very attractive structure for many small cleaning companies. However, if you anticipate significant annual losses or profits (in excess of $250,000), or if you plan to employ multiple cleaners across state lines, your company may benefit more from incorporation than from LLC status. Be sure to consult with an accountant or licensed tax professional before making your final decision about how to structure your company.
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Just the Facts
How Corporations, LLCs and Sole Proprietorships/Partnerships Stack Up
Still can't decide what the best structure is for your company? Review this quick comparison of sole proprietorships/partnerships, LLCs and corporations.
Sole proprietorship/Partnership
What is it: Simple and inexpensive way to set up your cleaning business.
Who's it good for: Small companies with few employees and limited liabilities.
Pros: Easy and inexpensive -- all you need to do is obtain the necessary licenses, order some cleaning supplies, and implement a good advertising campaign.
Cons: No protection from company debts and liabilities; fewer tax advantages than LLCs and corporations.
Corporations
What is it: A legal entity that separates company assets, income and liabilities from those of its owner(s). There are two types of corporations, each with different tax implications: "S" and "C". Most small to mid-size businesses choose "S" status.
Who's it good for: Growing companies interested in protecting the personal assets of their owners while benefiting from tax advantages.
Pros: Protect your personal assets, deduct self-employment taxes from your Adjusted Gross Income, and use corporate losses to offset income from other sources.
Cons: Most expensive, complicated structure; more red tape and greater accounting complexity. Owners of C-corporations are taxed twice -- on the corporate level and the shareholder level (hence, why most small biz owners elect "S" status).
LLC
What is it: A legal hybrid of sole proprietorship and corporation.
Who's it good for: Owners of small and mid-size companies that want to protect their personal assets while avoiding the hassle of incorporating.
Pros: Accounting simplicity, liability protection and asset allocation flexibility.
Cons: May be subjected to additional state taxes, cannot deduct business losses from Adjusted Gross Income.
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Using Clean Team Products
Tile Brush
A good tile brush is definitely a handy thing to have around the house since it has so many uses beyond just scrubbing tile.
We have purchased our Clean Team tile brush from the same great Midwest company for over 20 years. Originally it was used as a dairy brush and had a wood handle. Over the years, the handle became plastic and its most popular use has been as an automotive wheel brush.
We obviously aren't using the brush for dairy cows or even car wheels. Instead, we have discovered that this excellent brush is the best tile brush we have ever tried. It's also a great counter brush, especially if you have tile counters. Other good uses for the brush include scrubbing spots on concrete floors and other rough surfaces and scrubbing screens.
The construction of the bristles is truly genius. They are sufficiently stiff to dig into grout lines and they point forward, making the brush the perfect tool for tough-to-reach corners. The bristles also stay stiff even after they have been wet and dried many, many times -- making this brush the perfect choice for busy cleaners.
Despite its many advantages, there are a few chances for user error. Be sure that you don't bear down too hard (good advice for any cleaning brush). Extra pressure splays the bristles, so they aren't scrubbing anything. A light touch, on the other hand, actually allows you to feel that the bristles are in fact digging into the dirt lurking within the grout lines. Just remember the motto: "Don't work harder, just smarter!"
Also remember that even a work-horse like the tile brush will eventually need to be replaced. When your brush starts to wear out, you will know because your cleaning will become slower and less effective. | |
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Thanks for reading us this month! Come visit us on the web at www.thecleanteampro.com.
Sincerely,
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Jeff Campbell
The Clean Team Catalog |
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