At this point you have decided to start a cleaning service, but you don’t know what your business structure should be – a sole proprietor, partnership, LLC, or Corporation. The information is confusing, there is paperwork to be filed, and it costs a lot of money to get advise. Well, not really, I am here for you.
Most cleaning services start out as sole proprietorship. For some this works, but I strongly caution against this. Before I explain why, you need to know the differences between different structures.
Sole proprietorship is the simplest form of business that directly ties the owner to the same without providing any protection to his/her assets by being a different entity. Basically, the owner is solely responsible for all debt, benefits from all income, and the business is he or she for any legal purposes.
A corporation is an entity for itself and the owner becomes a shareholder of the same. In essence, this means that the corporation itself is liable without the owner being subject to any liability through his personal assets. The actions and debts of the business are all on the business and therefore do not affect owners private assets. Special taxation rules apply as well as both entities including the owner and the corporations have to pay separate taxes.
A Limited Liability Company (LLC) is a mix between the two. This legal structure is maintained by the states and not the federal government, so all income flows through to the owners, however, any liability is limited to the company only and owners personal assets and owners as an entity are protected.
For a cleaning service, I strongly recommend the LLC structure. You will work in expensive homes, offices with confidential information, and businesses with proprietary technologies and processes. If something happens due to your mistake or the mistake of your employees, you want to make sure your personal assets are protected and off-limits in case of a law suit.
Formation of an LLC can appear to be a daunting task, but services such as LegalZoom and others offer to complete the entire process for you for as little as $150. I would highly recommend using such a service as they do a great job at an affordable price and ensure that all is right. Please be aware that before you can form an LLC, you need to obtain a FEIN number from the IRS. Many websites will try to charge you upwards of $50 for this, but you can easily obtain this number online from the IRS online system in less than five minutes. As an alternative many states offer a free formation service online or free forms for you to complete yourself.
Once this step is completed, you will have the necessary paperwork to complete many other tasks such as opening a business checking account.