Deciding on the legal structure of your cleaning business is a step of high importance. It will very much determine the legal requirements of your cleaning business down the road.
Depending on the legal structure you decide upon, you as the owner and your cleaning business as an entity, you’ll need to comply with certain laws and regulations.
Note that you can change the legal structure of your business whenever you decide to do so, meaning, you can start as a sole proprietor and change to L.L.C. later.
When deciding the legal structure for your cleaning business, the most important aspects to consider are the start-up cost, cost of operations and taxes and finally, liability.
Business Legal Structures you could use for your Cleaning Business
Picking the right legal structure for your cleaning business is a little… technical. As with every other business, the “right” legal structure depends on your very own needs. To begin with, you can seek advice by visiting the Business USA government guide. You can also seek expert accountant and legal help however, especially if you choose to start your cleaning business in any other form but sole proprietorship.
Here’s an overview of the basic legal structures you can use for your cleaning business to get a first idea:
Sole Proprietorship
Extremely common for small cleaning business start-ups. Sole proprietorship is the most popular legal structure, especially when it comes down to small businesses. That’s because sole proprietorship is easy to establish and run. It’s also the cheapest way to start a cleaning business. The owner of the business is the one and only person to call the shots, decide on matters concerning the business and held liable for all his own and his business actions. The owner doesn’t have to consult other partners, investors or board of directors nor hold others accountable for his decisions, whether right or wrong. In this legal structure of a business, the sole owner is completely responsible for the business’ finances. Which means that should the business’ operations fail, the owner will be held responsible and be called upon to pay the damage with his personal assets on top of his business’ assets.
Obviously, the borrowing power of such a business is not only based on the business’ assets but on the personal assets of the owner as well. The only formal paperwork required to start a sole proprietorship are the registration papers that must be completed with the clerk and submitted to the authorities of the city or town the business is going to operate. Despite that fact, sole proprietorships are free to operate in any state of the country without having to adhere to that state’s statutes.
Finally, the sole owner is the only responsible for the employer’s share of the 15% employees’ taxes.
General Partnership
Very similar to Sole Proprietorship but with a few, key differences. This legal structure includes at least two (can be more) partners that share costs, investments and profits or losses of the cleaning business. The partners are both responsible for the business entity they form, its operations and finances. The profits or losses of the cleaning business are accounted to the respective partners in the form of individual tax returns.
LP – Limited Partnership
A Limited Partnership is very similar a legal business structure as General Partnership. A Limited Partnership is formed if in the addition of two or more GPs (General Partners), there is a third or more LPs (Limited Partners). Only one of the partners is required to be a general partner. As with a general partnership…
“An act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership’s activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners.“
The LPs have limited liability. This means they are liable on the cleaning business’ debts only to the extend of their own investment. As a result, Limited Partners have no management authority to comply with their limited liability.
LLP – Limited Liability Partnership
Very similar to Limited Partnerships with the key difference lying in the fact that ALL partners have limited liability. This structure offers both the protection of limited liability as found in corporations and the tax related benefits of a partnership.
Corporation
The most common form of large, or extremely large companies. Corporations are entities all by themselves, hold liable for their own actions and finances. They are completely distinct and separate from their owners and investors; the corporation has juridical personality and is subject to taxation of its profits and liable for any damage it sustains. Investor liabilities are limited to the amount invested in the corporation. Their personal assets are completely protected but at the same time, they have no authority or saying in running the corporation.
C Corporations
These are publicly held companies; their stocks are sold to the public. For the stock share holder, earnings occur when the corporation makes money. The major disadvantage of this form is that income is double taxed since the corporation’s earnings are subject to taxation before it distributes profits to stock holders. The dividends earned by the stockholders are then again, subject to further taxation.
S Corporations
On the contrary to C Corps, S Corporations are not subject to double taxation. This type of business legal structure enjoys a special taxation status. Forming such a corporation allows to both benefit from the limited liability of a corporate shareholder and get taxed as a sole proprietor or a simple business partner. As opposed to C Corporations, S Corps don’t pay taxes themselves; all earnings pass to the business owners which are solely responsible to report that income on their personal tax returns. . An S Corporation is responsible for filing an informational tax return to declare each owner’s share of the corporation’s income.
LLC – A Popular Legal Structure for Cleaning Businesses
LLCs or Limited Liability Companies are a very popular business form both overall and in the cleaning business industry in particular. LLCs combine the best aspects of a corporation and partnerships while taking away some trouble these forms come with. Like S Corps, Limited Liability Companies practice flow through taxation. To register an LLC, you’ll have to submit an operating agreement which will clearly state the purpose of the business, how revenue will be split among the owners, what happens if one partner leaves the company etc. While LLCs are NOT corporations, they carry nearly the same weight to match the benefits. They are expensive to form and maintain and there are annual fees that need to be taken care of.
Disclaimer: The above article was written based on research and previous experience. We’re NOT a LAW FIRM. While a lot of effort has been invested to make the guide as accurate as possible, should you choose to start a cleaning business in either of the above or other business legal structures, you should seek the advice of an attorney and / or of an accountant. The above guide is only for you to get a first clue, such matters are extremely complicated and require the attention and care of a professional in the field.