The different types of cleaning business ownership

Post image for The different types of cleaning business ownership

by Tom Watson on January 20, 2013

The act of starting a cleaning business involves making some decisions very early on. None of them are terribly hard, but each one requires that you do a little homework nonetheless.

One of first decisions you need to make is figuring out what form of business ownership you will be pursuing. The main choices are registering as a Sole Proprietor, as a Limited Liability Company, S Corporation, Partnership or a traditional C Corporation.

Just like anything else, each one will have their own advantages and disadvantages. The goal for you should be to find the one that matches both your budget and your business objectives. This means there is no one size fits all answer to what’s best.

In other words what may be good for one person may not work for another. So the goal for you is to NOT COPY what you see others do. Instead think through the process and come to your own conclusion, as this will definitely yield the best results.

When starting my company I went with a Sole Proprietor to begin with, then switched over to a Limited Liability Company as the business grew. I did that because that was cheapest route available that I knew of not to mention it fit my overall objective of “keeping it simple” in the beginning.

Anyway… I’ll briefly go over each available option, giving you some generalized advantages and disadvantages for each type of ownership option. Please keep in mind I don’t promote or endorse one kind of structure over another and this article does not offer a total picture of the process. It’s only meant to get you to “think about” the process and encourage you to investigate it more throughly.

Sole Proprietor

This type of ownership structure is both the simplest and most common one in use today. Going this route means you are an unincorporated business owner. You are entitled to all the profits the business generates AND all the debts, losses and liabilities.

Advantages – This is an easy and inexpensive way to get started. You also have complete control because you are the only owner of the business. It also has the benefit of an easy tax preparation, because your business is not taxed separately.

Disadvantages – Because you and the business are “one”, you have unlimited personal liability. This means you can be held completely responsible for all debts and other liabilities that you created with the business.

 Limited Liability Company

This kind of business structure is a hybrid that gives you both the limited liability features of a corporation and the easy tax preparation benefits of a Partnership. A Limited Liability Company may or may not have more than one member listed as an owner depending on the state you live in.

Advantages – Members are protected from personal liability for business decisions that the LLC participates in. Keep in mind that members don’t have total protection on all matters, hence the “limited liability” moniker.

Disadvantages – A LLC may have to terminate if one or more members decides to leave the company. In addition members are required to pay self employment taxes, which means you must contribute to social security and medicare (based on total income reported on LLC return).

Partnership

This type of arrangement is simply a single business that two or more people have ownership of. The different type of Partnerships include General Partnerships, Limited Partnerships and Joint Ventures. Generally each partner contributes and shares in the profits and losses that are created.

Advantages – They are normally easy and inexpensive to get started not to mention the workload is shared by more than just one person, thus spreading the work around. Each partner has a “shared commitment” to making it work as well.

Disadvantages – You have full liability for any debts or losses incurred. You may also be liable for actions of your partner, which means increased liability overall. Disagreements can be common among the partners as to how to operate the business.

S Corporation

This is a corporation that chooses to be taxed differently than a regular corporation. Generally this means that S Corps do not pay federal taxes. Instead income and losses are divided among the shareholders, who then report those gains or losses on their individual tax returns.

Advantages – Certain tax savings are enjoyed by this type of entity over other forms of business ownership. Another advantage is that if one or more owners decides to leave, the business can continue to operate. In addition some tax credits may be available that are not available elsewhere.

Disadvantages – This type of operation has very strict operational and reporting requirements making it complicated to run. You are required to have shareholder meetings, have minutes taken and keep excellent records.

Corporation

This is a completely independent legal entity owned by the shareholders. In other words this means the corporation itself (not the shareholders) is held liable for the actions of the company. This is a complex structure that is generally reserved for established companies.

Advantages – Personal assets are protected and generally only the shareholders personal stock in the company are at risk. They also have the ability to raise money through selling stock in the firm.

Disadvantages – They are very time-consuming and costly to operate. Taxes can be very high because you can be taxed twice (both at the company level AND personal level). Tons of paperwork is involved in keeping accurate records.

I’ll wrap this up by reminding you that the decision to choose one kind of business structure over another is very personal and should be carefully thought out. I would advise you to speak to an accountant and lawyer before choosing what to do for yourself.

The various tax and legal implications that each choice brings to the table make this a complicated decision that no one article can easily summarize. Speaking with the appropriate professional in both the legal and accounting fields will help you navigate them safely and is highly recommended.

If you liked this post, you can subscribe to our RSS feed. If you are looking for a blueprint that will show you how to start a cleaning business, then check out my Cleaning Business Start Up Guides. If you are badly in need of a first class website then take a look at my Cleaning Business Websites.

{ 2 comments… read them below or add one }

1 Cleaning Services Kent May 29, 2013 at 10:16 am

Hi

the above is useful thank you. From our own experience in the UK, we would recommend that you start off as a sole trader since the amount of paperwork required by the tax authorities is low. Then when you get to a turnover of at least £100,000 per annum set up a company.

2 Tom Watson May 29, 2013 at 10:31 am

THANKS for giving us the details for the UK! I appreciate that.

Leave a Comment

Previous post:

Next post: