What business structure is best for a cleaning company?
Choosing the right business structure is likely to be one of the most significant decisions to be made in the establishment of a cleaning company. The type of business entity you choose will be a major determinant to the liability you will face, your tax obligation, the potential to raise capital, and your capacity for growth. There are several options, so weigh all of them in light of your specific business needs and goals. Here are some summaries on some of the popular business structures you may consider for your house cleaning service:
Sole Proprietorship
The simplest form of business organization is that of a sole proprietorship, which is relatively simple and inexpensive to start up. You are the only owner of the business. You are also fully responsible for all elements of and decisions regarding the business. The profits earned by the business are considered personal income to you and are therefore taxed as such.
One of the big advantages of a sole proprietorship is that it is simple. You are not required to file special paperwork with the state or abide by rigid corporate formalities. It's very easy to mix business and personal assets and to report business income and losses on your personal tax return.
But the big downside to a sole proprietorship is that, legally, you, the business owner, and your business are one in the same. You are fully responsible for all debts and any commitments of that business. This means lawsuits or going broke could cost you your personal assets. Furthermore, a sole proprietorship will often find it harder to secure money and build customer confidence.
A sole proprietorship may make sense in the case of a very small, start-up, residential cleaning company where one wants to control spending on both expenses and administration. It might be best to start off with a sole proprietorship and then, as the business grows and more potential liabilities are assumed, consider a different business structure.
Collaborative
A partnership is basically a sole proprietorship on steroids: two or more persons share ownership of a single business. There are two main forms of partnerships: general partnerships and limited partnerships.
In a general partnership, the partners are involved in the management of the business and share the liabilities arising from the debts of the business. Profits are passed to the returns of partners minus their individual rates of income tax. General partnerships are quite easy to set up but they offer no form of liability protection to the partners.
On the other hand, the limited partnership structure is where there is a general partner and one or more limited partners. The general partners are responsible for the running of the activities of a business and are held personally responsible for the debts of the business. Limited partners just contribute capital for investment in a business; they are silent and are only responsible for a certain amount that is limited to their investment. Limited partnership is more complicated to set up, and special rules apply in terms of taxation.
The form of partnerships may be most relevant to those interested in the business with the family members, friends, and close associates who possess the required complementary skills and resources. Partnerships work well when the two or more partners share the same vision and agree on major decisions of the business. A clear partnership agreement has a good description of the roles, responsibilities, and arrangement of sharing of the profits.
LLCs
The Limited Liability Company, or LLC, is among the most popular organizational forms because it combines the liability protection of a corporation with the tax benefits and flexibility of a sole proprietorship or partnership. Limited liability is one of the principal, if not the primary, benefit given by a limited liability company to its members or owners concerning the debts and obligations of the business. That is to say, in the event that the LLC is sued or goes bankrupt, the personal assets of the members are usually protected, including their home, car, and savings.
An additional benefit of an LLC is the tax status an LLC may choose. An LLC's default tax status is that of a pass-through entity, which means a business's profits and losses are reported on the personal tax returns of its members. An LLC also has the option of electing to be treated as a corporation if it benefits the LLC.
While an LLC does require a bit more paperwork and fees to both establish and to maintain than compared to a sole proprietorship or partnership, in most states you will need to file "articles of organization," you must obtain any necessary licenses and permits, and you must create an operating agreement that dictates the ownership and management of your LLC. But the ongoing compliance requirements are far less burdensome than those of a corporation.
An LLC is the right alternative for cleaning services that are small to mid-sized, need liability protection, and also have some flexibility in the matter of taxes without the need for the complexity of a corporation. In addition, an LLC may be attractive in businesses where the owners want clearly defined roles and responsibilities.
Corporation
A corporation is an artificial legal person separate from its owners, overseen by a board of directors. Two central types of corporations are C corporations and S corporations.
C corporations are entities that are taxed separately; that is, the business earnings are taxed at the corporate rate and then taxed at the individual level when dividends are issued. Double taxation is a strong drawback for C corporations. On the upside, C corporations have the most latitude in issuing stock to raise capital and can offer very generous employee benefits and stock options.
On the other hand, S corporations are much like LLCs regarding the manner in which business profits and losses pass through and are taxed at the individual income tax rates of the shareholders. A given S corporation is subject to more restrictions than a C corporation, including a maximum number and type of shareholders.
A big advantage for the corporation is that it provides the highest level of protection of the owners' liabilities, and the shareholders usually are not held liable for debts and liabilities of the corporation. Corporations are also able to raise more capital and confer more legitimacy on the part of the customer and vendor.
Unfortunately, corporations are the most expensive and cumbersome to set up and maintain. Corporations involve significant amounts of bookkeeping and record-keeping; they must hold board meetings periodically, and they must comply with a great deal of state and federal red tape. Because of these considerations, the burden can be too overwhelming to keep up with for a smaller cleaning business.
A corporation would be the right option for larger, already-established cleaning businesses looking to raise significant capital, with many employees and shareholders, looking for the greatest possible protection against liability, and a professional, prestigious demeanor. But for most small and medium-sized cleaning businesses, the more streamlined and flexible LLC tends to be the preferable choice.
Cooperatives
A less common yet potentially viable business structure of the cleaning business is a cooperative whereby the business is owned and democratically controlled by member employees or consumers using its services. Profits are distributed to members in proportion to their level of participation in the cooperative.
Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. They generate a strong sense of community among members and promote the members' empowerment, ensuring that the profits are equitably shared by members.
However, these cooperatives can be difficult to run and maintain in the long term. They require a lot of coordination and communication among members and require that decisions be made collectively. Outside capital is tough to raise because a cooperative cannot sell stock.
For a few maid services, this might be an appealing option if they would like to work cooperatively together in a non-hierarchical manner; this requires a common vision compelling enough to be realized through this cooperative model.
Which Business Structure is Right For My Cleaning Company?
As shown, there are quite a few different types of business structures you can use for your cleaning company, each with its own benefits and downsides. Your best choice will depend on several different factors, including:
The size and scope of your business
The level of risk you are willing to take in personal liability
Your growth and expansion plans
Your need for outside capital and financing
Your tax situation and preferences
What you really appreciate simplicit or formality.
The way you manage and structure the ownership
If you are just starting out, you might be fine with a sole proprietorship or partnershipᅳjust to test the waters. But as your cleaning business grows and begins to accrue increased risk, organizing as an LLC or corporation can offer valuable liability protection and a number of other benefits.
It will have to come down to what the best business structure for a cleaning company is. Make sure to go through your options with a fine-tooth comb and consult with legal and finance professionals who will help put you in right direction based on your circumstances. Set up the correct business structure to begin with, and you will lay a solid foundation on which to build the success and sustainability of your cleaning business for many years to come.
