By Arianna Aguilar

One of the questions that new interpreters and translators often have is how to start and run a business. This is a complex matter; there are several different business structures, and each has its own tax implications and rules and regulations at the local, state, and federal levels.

The most common type of business structure, and the simplest, is the sole proprietorship, which is an incorporated business with one owner. It’s easy to set up, since there is virtually no paperwork—you can just print your business cards and start working. However, each jurisdiction, such as a town or a county, may have its own requirements for starting a business. Some local entities, for example, may require that the sole proprietor register or obtain a license or permit to operate a business, even from the home.

Many sole proprietors take on a business name, “doing business as” or DBA. According to the Small Business Administration, “a fictitious name (or assumed name, trade name or DBA name) is a business name that is different from your personal name.” (U.S. Small Business Administration, 2017a). A DBA name may be registered either with your county or state government, depending on where your business is located. Some jurisdictions do not require an owner to file a DBA name. A DBA name does not mean that the business is legally a separate entity; it simply operates under an assumed name.

Filing taxes for a sole proprietorship is less complicated than for other business structures. The owner needs to file a 1040 U.S. Individual Income Tax return and a Schedule C Profit or Loss from Business, and pay self-employment taxes (Social Security and Medicare) and quarterly estimated taxes. Owners do not pay themselves as employees; rather, all profits and losses of the business are the profits and losses of the owner.

One of the advantages of a sole proprietorship is that it is easy to establish and maintain. Other advantages are that the sole proprietor has all of the power and decision-making; there are no corporate tax payments, and little paperwork.

The disadvantages, according to an article in the New York Times, are that: “Sole proprietors are personally liable for the debts of their business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.” (Allbusiness.com) This means that if the business is sued, the sole proprietor could lose assets, such as property and bank accounts. Also, “all responsibilities and business decisions fall on the shoulders of the sole proprietor, [and] investors won’t usually invest in sole proprietorships.” (Allbusiness.com).

A step up from a sole proprietorship is a partnership, in which “each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.”  (Internal Revenue Service. 2017b).  In return, each partner shares in the profits and losses of the business.

Because more than one person makes the decisions, it is wise to have a partnership agreement that details decision-making procedures, division of profits, dispute resolution, and changes in ownership. Although having an agreement is not required, it is strongly recommended.

In order to form a partnership you will need a business name. According to the Small Business Administration, “For partnerships, your legal name is the name given in your partnership agreement or the last names of the partners. If you choose to operate under a name different than the officially registered name, you will most likely have to file a fictitious name.” (Small Business Administration, 2017a). Once you register your business, you must also obtain licenses and permits from either local or state government. You will also need to obtain a tax ID number from the IRS.

The IRS says that “a partnership must file an ‘annual information return’ to report the income, deductions, gains and losses from the business’s operations, but the business itself does not pay income tax. Instead, the business ‘passes through’ any profits or losses to its partners. Partners include their respective share of the partnership’s income or loss on their personal tax returns.” (Internal Revenue Service, 2017b).

Therefore, partners are not employees and will not receive a W-2. Rather, they will receive a Schedule K-1 (Form 1065, U.S. Return of Partnership Income). Individual partners in a partnership would file a 1040 U.S. Individual Income Tax Return, Schedule E (Supplemental Income and Loss), Self-Employment tax (Schedule SE) and Estimated Tax (1040-ES, Estimated Tax for Individuals). Since employees will receive a W-2, employment taxes would need to be paid, which include Social Security, Medicare, federal unemployment tax, and state payroll taxes.

One advantage of a partnership is that it is generally inexpensive and easy to form. Also, since each partner shares in the financial commitment, the business can benefit from the skills, resources, money, and expertise of each partner. One disadvantage of partnerships is joint and individual liability. Just like sole proprietorships, partners are liable for their own actions. With a partnership, however, the partners are not only responsible for personal liabilities—they are also responsible for the debts and decisions made by other partners, and personal assets can be used to satisfy the partnership’s liabilities. Also, when multiple partners are involved, decision-making is obviously more difficult, which can hamper the smooth running of the business.

Another common business structure is the LLC (Limited Liability Company). An LLC is a structure allowed by state statute, so if you wish to form one, you must contact your state’s regulatory office. In many states, that will be the Office of the Secretary of State. “Owners of an LLC are called members,” according to the IRS. “Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit ‘single-member’ LLCs, those having only one owner.” (Internal Revenue Service, 2017a).

The default federal tax classification is the following; “A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.”  (Internal Revenue Service, 2017a).

LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member. LLC members report profits and losses on their personal federal tax returns, just as the owners of a partnership would. Each state is different, but the basics are the same when forming an LLC. First you must choose a name, and then you must file articles of organization that include information such as the names and addresses of members. The office where the articles must be filed is usually the Secretary of State, but some states have a different governmental office that handles the articles of incorporation. You must also create an operating agreement, which can be basic or detailed. An operating agreement will spell out things such as percentage of income and losses, decision-making and other provisions.

To operate an LLC you will then need to obtain the required licenses and permits, such as a home occupation permit, which interpreters and translators who work from home may need from their local city or county. The advantages of an LLC include limited liability (although it doesn’t necessarily shield members from the consequences of wrongful acts) and ease of operation (less paperwork, start-up and organizational costs, and filings). A disadvantage of an LLC is that members are considered self-employed and therefore must pay self-employment taxes on their net income from the LLC.

Corporations are another business structure. A corporation (sometimes referred to as a C Corporation) is a legal entity owned by shareholders. Only the business itself is legally liable for actions and debts. Corporations are called “C Corporations” as per Subchapter C of Chapter 1 of the Internal Revenue Code. To form a corporation, you need to establish a business name and file articles of incorporation with the state. Most states require the name of the business include certain language, such as Corporation, S-Corps, or Limited. After being registered, the business must acquire the necessary federal, state, and local permits, licenses and registrations.

Corporations pay income tax on the profits, and must file IRS Form 1120, U.S. Corporation Income Tax Return with the federal government. Shareholder employees only pay taxes on the money paid to them directly by the company, such as a salary, bonuses and dividends. One benefit of establishing a corporation is that shareholders’ personal assets are protected. In addition, the company can raise capital and go public by issuing stock.

The disadvantage of a corporation is that it can be costly and time-consuming to operate and maintain. You most certainly will need to contract the services of a business law attorney, a tax attorney and an accountant. Since corporations are highly regulated at local, state and federal levels, there are requirements for paperwork and recordkeeping. Therefore, C-Corp status is generally a good choice only if the company is large, or looking to expand, and has investors. Another consideration is that corporations are taxed twice in some cases; first, on the profits and then when dividends are paid to shareholders.

A variation of the corporate structure is the S-Corp. Like an LLC (limited liability company), S-Corps provide limited liability protection, separate entities, pass-through taxation, and state-mandated formalities such as annual reports. Unlike LLCs, which can have an unlimited number of members, S-Corps can only have 100 shareholders. In addition, an S-Corp can’t include non-US citizens or residents among the shareholders, and there are more paperwork formalities. For example, S-Corps must file articles of incorporation, adopt bylaws, hold shareholder and director meetings, preserve minutes of those meetings, record stock transfers and maintain other corporate paperwork. S-Corps have a board of directors that elects officers who run the day-to-day operations of the organization.

To be considered an S-Corp, you must first register as a corporation in the state where your business has its headquarters. After you register as a corporation, you must then apply for S-Corp through the IRS. It is a special type of corporation created through an IRS tax election (Subchapter S Designation, applied for via IRS Form 2553). By electing to be treated as an S-Corporation, “double taxation” is eliminated. In other words, there are no taxes both to the corporation and to the shareholders. Instead, the profits and losses can pass through to the shareholder’s personal tax return. Therefore, the shareholders are treated as employees and, according to the IRS, must be paid “a reasonable compensation.”

Since the shareholders are employees, an S-Corp must obtain Employer Tax Identification Numbers from the IRS and register for and pay State and Federal payroll expenses. This means that you will need to invest in accounting software to keep up with bank transactions, payroll, profit and loss, balance sheets, etc. Corporation status thus involves added expense and paperwork.

So among all of these options, which should an interpreter or translator choose?

Most interpreters, especially those with no employees or subcontractors, will by default start out with a sole proprietorship. However, if the owner’s business grows, if she lands a new contract, for example, or if she decides to add subcontractors or employees, she may consider restructuring the business to better protect her assets.

Business attorney Rom Trimyer with the Mast Law Firm in North Carolina suggests the following to interpreters and translators: “You need to register and protect yourself with an organization, such as an LLC or corporation. Talk to a CPA first and tell him what type of business you are in so that he can give you advice regarding the tax consequences. Every business is different; there’s not a one size fits all. Speak to an attorney for a paid consultation (which should cost around $200-300 for an hour) to get information regarding setting up your business. A basic setup for a corporation or LLC will probably run from $600 to $1,000.”

Regardless of the business structure you choose, he stressed, “Keep the money separate. Do not comingle business funds with personal accounts. Set up bank accounts for your business. All money received should go in that account and disbursed properly.”  (Trimyer, 2016). He also mentioned that there are many self-help websites out there, most notably legalzoom.com, which is run by attorneys.

Whether you do it yourself, hire an attorney, or contract with a self-help website, take some time to do your research and find out what business structure is the best for you.

[Arianna Aguilar is an editor for Proteus.]

References

Allbusiness.com. “Advantages and Disadvantages of Sole Proprietorships.” (June 2007).
http://www.nytimes.com/allbusiness/AB4113314_primary.html

Internal Revenue Service. “Limited Liability Company.” (2017a).
https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc

Internal Revenue Service. “Partnerships.” (2017b). https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Partnerships

Small Business Administration. “Choose your business structure-Partnership.” (2017a) https://www.sba.gov/starting-business/choose-your-business-structure/partnership

Small Business Administration. “Register Your Business Name.” (2017b). https://www.sba.gov/starting-business/choose-register-your-business/register-your-business-name

Trimyer, Ron. (2016, April 30). Personal interview.

Resources

Link to find regulations by State: Small Business Administration. https://www.sba.gov/starting-business/business-licenses-permits/state-licenses-permits

Allbusiness.com. “Advantages and Disadvantages of Sole Proprietorships.” (June 2007). http://www.nytimes.com/allbusiness/AB4113314_primary.html

Bizfilings.com. “LLC vs. S. Corp: Which Business Type is Right for me?” (2016). http://www.bizfilings.com/learn/llc-vs-s-corp.aspx

Dahl, Darren. “Should your Business be an LLC or an S Corp?” (March 2011. Inc. www.inc.com/guides/201103/s-corp-vs-llc.html

Internal Revenue Service. “Partnerships.” (February 2016). https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Partnerships

Khwaja, Ameen. “Choose your Business Structure.” Entrepeneur.com https://www.entrepeneur.com/article/38822

Laurence, Beth. “Choosing the Best Ownership Structure for your Business.” Nolo. http://nolo.com/legal-encyclopedia/business-ownership-structure-choose-best-29618.html

Small Business Administration. “Register your business name.” (April 2016). https://www.sba.gov/starting-business/choose-register-your-business/register-your-business-name