Which birth business structure is right for my birth BUSINESS?
What legal structure you choose highly depends on what you want to do with your business, the level of acceptable risk for your business, and what resources you have available to you. The three types of business I suggest for a small birth worker business consist of a sole proprietorship, a partnership or a limited liability company. A few other business structures occur frequently, but none I recommend for a small birth business. Here is little bit about each type.
Keep it Simple with a Solo Practice
The simplest and most common form of business is a sole proprietor. A business which is owned and run by one person with no clear distinction between the business itself and the owner is considered a sole proprietorship. You get all the profits, but take all the risk. Sole responsibility for start up funds, taxes, profits, and losses. Sole proprietorship's incur unlimited liability in which a client could sue you for everything you own, not just business assets. They could sue you for your house, car, and personal bank accounts. A sole proprietorship can easily become established and does not require any formal action on your part. You step into the shoes of a sole proprietorship anytime you offer services to another person or business in exchange for payment. Like any business you will need the proper licenses and permits required in your state and in your industry. Doulas, childbirth educators, and birth assistants at the time do not require any special regulations.
Advantages of a Sole Proprietorship
Double up with a Partnership
A partnership consists of a single business which encompasses two or more people who share ownership. This can help ease the workload and responsibilities of a business because each partner contributes to all aspects the business, including money and labor. In terms of birth workers this means someone you can share your on call time with and someone who can help you make decisions regarding what services to offer, what your contracts should state, and how to market. In return each partner gets a share in the profits or loses the business incurs.
The two types of partnerships I recommend include a general partnership and limited partnership. In a general partnership all profits, liability and management duties divide equally among the partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement. A limited partnership allows partners limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage.
Forming a partnership is a bit harder than a sole proprietorship. Partnerships require you to register your business with your state as well as obtain the proper licenses and permits. It also requires you to register your business name and make sure no one else in your state already uses that business name or something similar. You will need to file and obtain a tax ID number or Employer Identification Number (EIN) in order to file your taxes.
A partnership must file an “annual information return” to report income, deductions, gains, and losses from the business operations, but the business itself does not pay income tax. Each partner gets a portion of the income, per the partner agreement and then the partners report this income on their personal tax returns.
You need to remember the importance of a formal legal partnership with documented procedures on all of the “what if” scenarios that may occur.
Advantages of a Partnership
Disadvantages of a Partnership
Limit Your Risk with a Limited Liability Company
A limited liability company (LLC) consists of a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. This type of company contains one or more owners. LLC’s don’t get taxed separately like a corporation, but do retain a separation of owner and the business. This allows profits and losses to pass through the business to each member of the LLC and for the members to then report any profits or losses on their personal federal tax returns. One of the biggest perks of an LLC, the owners do not have personal liability, so if a client decides to sue only business assets are at risk.
Profits do not have to be split evenly between owners much like that of the partnership. Those involved will create contracts which state who owns what percentage of the company. One idea to keep in mind is the more people you have sharing in decision making the longer it will take to make a decision.
Advantages of an LLC
Disadvantages of an LLC
A great free resource to look into how to file for an LLC in your state check out LLC University. Or check out the Small Business Association.
What type of business structure do you think will give you the most room to grow? Share your business questions in the comments.