The decision to start a junk removal business may have been an easy one, but choosing your legal structure may not be quite as simple. In regards to starting a business, there are several different legal structures to choose from that will determine capitalization, control, taxation, liability, and other important factors. Use this guide to understand your options, and to find the structure that aligns best with your business.
The two most-common types of legal structures can be grouped into two categories: basic and hybrid.
1. Sole Proprietorship: a business entity owned and run by a single person.
- Creation: easy - no partners, board, or papers
- Capitalization: can be difficult because it requires initial capital to pay for supplies and employees until sufficient revenue is earned
- Control: owner has complete control
- Compensation: owner only gets paid through profit
- Taxation: entity does not exist separately from its owner; therefore, there is no tax return and no income tax
- Liability: the owner is personally liable for all incidents incurred
This is how local junk hauling businesses begin: a single person starts a business, and when enough growth is achieved, they hire employees. The only major downside to sole proprietorships is having to muster up the initial capital to pay for a truck and other supplies. If you are not exactly sure what you’ll need to begin, check out our other blog post: 8 Things You Must Have To Start A Junk Removal Business.
2. Partnership: two or more people carrying on a business as co-workers for profit.
- Creation: by contract between partners (typically verbally or with written contact)
- Capitalization: easier than a sole proprietorship because more than one person contributes to the source of capital
- Control: all partners have equal say in business decisions, unless stated otherwise in the partnership agreement
- Compensation: all partners share profits equally, unless stated otherwise in the partnership agreement
- Taxation: employees pay tax on income, but the partnership does not pay itself taxes
- Liability: partners are personally liable for any incidents incurred
In the business of junk removal, this is another very common legal structure. Ever heard of College Hunks Hauling Junk? It all started with a group of college guys, a beat-up cargo van, and a partnership. Aside from joining in a contractual agreement, it is easier to begin than a proprietorship because you have access to multiple sources of capital. Often it is also easier to secure loans with more than one person, if you find you cannot initially fund the startup.
3. Corporation: recognized as a legal entity separate from its owners.
- Creation: must file article of incorporation because the creation of a corporation is a privilege granted by the state. A corporation is said to “reside” in the state of its incorporation
- Capitalization: either shareholders help fund the business, or the corporation borrows money from creditors with a promissory note to repay
- Control: lies in the hands of shareholders, directors, and officers
- Taxation: double taxation; corporation pays taxes on its profits and then distributes profits to shareholders in the form of dividends (that they must pay taxes on)
- Liability: the corporation is a legal entity, responsible for its own obligations; the owners (shareholders) are not liable for more than the value of their contribution - except in the case of fraud or other formalities
If you are just beginning your junk removal business, it is likely you are not quite ready to start a corporation. However, after years of growth and success, many small businesses restructure to create a corporation. 1-800-GOT-JUNK is a great example of a small business that eventually went corporate, and now has franchises across North America.
Hybrid legal structures are often implemented to remedy the personal liability and double taxation of partnerships.
1. Limited Partnership: involves one or more general partners (GPs) along with one or more limited partners (LPs) with restricted control.
- Creation: file paperwork with the state
- Capitalization: same as a partnership
- Control: only general partners have day-to-day control of the business
- Taxation: all partners take home profits in the form of distributions and are taxed; no taxes on the partnership as an entity
- Liability: only general partners are personally liable
If you are thinking of beginning your business as a partnership, this is a viable solution in avoiding double taxation. However, the company name must include the words “limited partnership”, and general partners assume complete responsibility. Limited partners may come and go by selling their partnership, but general partners’ withdrawal causes dissolution of the company altogether.
2. Limited Liability Company (LLC): Legal entity offering advantages of both a partnership and corporation.
- Creation: file articles of organization with the state
- Capitalization: can be funded through a single member, multiple members, or possible investors
- Control: Members have control over the LLC in direct proportion to the amount of shares or units of membership they own; usually control follows the sole proprietorship or partnership model (depending on the number of owners)
- Taxation: members pay tax on the income of the LLC that is allocated to them based on the agreement, unless the entity elects to be taxed as a corporation
- Liability: limited; each member can only lose up to the amount they invested in the LLC and cannot lose their personal assets
Although it is a fairly new legal structure, Limited Liability Companies have become a popular form of business organization due to their flexibility and exemption from double taxation. LLCs can choose their tax regime, and its members are more shielded from liabilities than in other structures. The downside is that, because this form of organization has not been around for long, and investors are often wary of investing in LLCs.
It is important to become knowledgeable about all of your options before choosing a legal structure for your business. After deciding upon the form of business that best suits your junk removal company, be sure to file all necessary paperwork with your residing state and become aware of all tax obligations and forms.
Disclaimer: This information is not intended as legal advice, but rather information to help business owners make educated decisions.
Anything we missed? Which structure have you found to be the best fit for your junk removal business? Let us know in the comments section below!