Entity Type For Your Business

Written by Eric Petersen, CIC

Sole Proprietorship: Sole proprietorship is the easiest to form, as it is just you. You as the individual and taxed personally. There are no special forms to fill out, but the downside is that the bank does not like to lend money to an individual person for business pursuits. Another downside to a sole proprietorship is unlimited liability because there is no legal business entity, so all of your personal assets are dragged into the business activity.

Partnership: A partnership is formed when 2 or more people are owner operators involved in the business. There is nothing legal that has to be set up as you are still taxed personally. Each partner has the authority to enter into contracts, take out business loans, and change the operations. Each of you will be held responsible for business activity. For a sole proprietorship and partnership, most use DBA (doing business as) to identify the name of the business. Just like sole proprietorships, there is a lot of personal liability for each of the partners, so while it is easy to set up, please understand there is more liability on the line.

Corporation (C or S): A corporation is the most complex and structured of the business entity types. The two most common forms of corporation are C and S Corporations where the main difference lies in how the organization is taxed. A C Corporation is taxed as a business and you, the owner, are viewed as an employee, so you also get personally taxed. With a S Corporation, the business does not get taxed, but rather it trickles down to you as an individual. The main benefit with a corporation is, when set up correctly, your personal assets are kept safe, apart from the business operations. There are requirements with a corporation that do not exist with other business entity types, such as the need for annual meetings with corporate meeting minutes being taken. You should employ the help of a CPA and attorney to set up a C or S corporation.

Limited Liability Company (LLC): A limited liability company is fairly easy to set up and probably the most common business entity type amongst tree services. There is less paperwork to get an LLC started and less requirements to keep it going than the corporation, however, like the corporation, if it is done properly, your business legal liability is separated from your personal assets. You will be taxed personally as the owner of the LLC. 

One point to consider when it comes to choosing the correct business type for your company are the workers compensation laws of your state. Work Comp policies for sole proprietorship and limited liability companies typically automatically exclude the owner while corporations are the opposite and the owner’s are included to start with. 

Lastly, ensure that all business assets, vehicles, equipment and properties are purchased by the proper entity and titled accordingly. We see a lot of vehicles that are titled in the owner’s personal name despite the business operating under an LLC. This eliminates the legal advantage to having the LLC as the personal assets of the owner are tied to that vehicle and not the LLC. 

To close, of all the decisions you make while owning your tree service, choosing the proper legal entity is one of the most important. Make sure to get the proper legal advice and understand the options that you have available to limit the liability and tax implications of the various business entity types.

4 Tips to Starting a Tree Service

Looking to start a tree service, but don’t know where to start? ArboRisk has developed the basics of starting a tree service to help start and grow a tree service while developing a solid root system to help your tree service thrive! Many arborists are good at tree work, but struggle with business operations and running a business.

Follow these tips from ArboRisk Insurance to help start your tree service!

To start your tree service, begin to focus on the following four aspects:

Strategic Planning: Set up the ground work
Basic Account & Management: Numbers that drive your business
Marketing & Sales: Where are leads coming from and how many sales need to be made
People Operations and Management: Who is needed and how work is going to get done

You can hire vendors or learn how to do the work yourself, but the number one thing you need as business owner is strategic planning! Set the foundation of where you are going with your business. To do this, create a written business plan, executive summary or mission statement. Compose the details of your services, where your customers are located and who they are. Are there any local competitors? What are the projected income and expenses, and how are you going to get the work done. These are all important questions to address when starting your tree service.

Also, take a step back to asses your business and assess your personal strengths and weaknesses. Once you have assessed your business, assemble a board of directors. This does not have to be formal, but who decides who you need and who can help you effectively run your business. The 3 main people you will need to effectively run your business is an attorney, accountant, and insurance agent. Consider a business coach, like a family member or a mentor. Create team and timeline. Keep business plan handy and every 3-4 months see how far have you have come and where you still want to go. Always keep your eyes on the bigger picture.

Need help taking your tree service to the next level? Contact ArboRisk today!

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