Since everyone’s financial situation is different, there is no one correct answer for everyone. The best and only person to advise you as to the right business structure for your travel business is an attorney competent in such matters. Before you start your travel business you should visit with both an accountant and an attorney. Decisions that you make when starting can affect you from a tax and a liability perspective and need to be dealt with properly. While it will cost you some money to seek this advice, it is money well spent.
Key issues to discuss with your legal and tax professional are:
Control: If you are a one-man or one-woman business, what happens to your ability to control the business under the various business structures?
Liability: How exposed is the business structure you decide to use to lawsuits and how might it affect your personal assets? How does it affect your business assets? Given your specific financial position, what protection would your legal, or tax professional suggest you take to protect yourself from loss based on litigation?
Taxation: Each business structure is taxed differently. What is the impact of the structure you choose going to have on your taxes? What is the cost of complying with accounting standards imposed by the structure going to be? What is the additional cost of filing tax returns going to be
Survivability: What happens to the business when you pass away? What are the issues of providing for the business distribution in you will or trust?
This article is only to introduce you to the various types of ownership options that you can discuss with your financial advisor and/or attorney. Each form of ownership has benefits and drawbacks and also, may have unintended consequences. So let’s take a brief look at your options.
Sole Proprietorship: This is by far the easiest structure to engage. All you have to do is declare your business and operate it as such.
Positives: Easy to set up. Easy to operate. File a “Schedule C” tax return along with your personal return and pay taxes on the profits as current income.
Negatives: There is no liability protection in case of litigation. You could lose everything. May look less professional than other options
Partnership: Partnerships are easy to establish, but many times much more difficult to dissolve.
Positives: Gain the benefit of different views and experience. File partnership tax return and distribution of profits to partners is taxed as current income.
Negatives: Partner disputes can cause the partnership to dissolve. Additional cost to file a partnership tax return. No liability protection and each partner is liable for all partner’s actions.
LLP (Limited Liability Partnership): LLPs are usually used by professionals to limit the individual partner’s liability for business debts.
Positives: Offers partners some liability protection from business debts. Can be formed easily from a partnership. File partnership tax return and distribution of profits to partners is taxed as current income
Negatives: Has a limited lifespan. Does not protect partners from liability for negligence on behalf of the partnership.
LLC (Limited Liability Company): LLCs differ from LLPs in that they act more like a corporation than a partnership. LLCs are used by most travel agents.
Positives: Liability is the main reason to use a LLC. It protects all of the owners of the LLC from losing their personal assets due to litigation. Again, taxes are passed through to the individual owner(s) and are taxed at current income rates.
Negatives: Possible loss of control of your business, possible tax ramifications on market value of the assets if converting another established business into a LLC. Single member LLCs may be set aside (especially if it is a man and a wife) by the IRS.
Corporation: Corporations are used by many to limit liability and insure survivability upon death.
Positives: Corporations enjoy limited liability from litigation and judgements and have excellent perpetual existence and transfer of ownership. It may also have some tax benefits for non-distributed profits.
Negatives: Corporation profits are taxed twice, once at the corporate tax rate and then when the profits are distributed to owners and employees, at the personal tax rate. Corporations are much more regulated than other forms of ownership. Since corporations must use the accrual method of accounting by law, the cost of keeping records is considerably higher than other forms of ownership.
Sub-Chapter S Corporation: A sub-chapter S corporation has all of the benefits of a corporation in terms of liability and perpetual existence.
Positives: it is not taxed at the corporate rate and profit pass through to the owners and are taxed at their personal tax rate. Once a year tax filing (not 4 times a year as in a corporation)
Negatives: Cost of creating and maintaining a Sub-Chapter S Corporation. There may also be closer scrutiny by the IRS than a LLC.
As you can easily see, there is a lot to consider when choosing your business structure for your travel agency. Be sure to seek the expert advice of an attorney and/or accountant before making the decision.
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