Two Common Ways to Start Your Cleaning Business

two people signing business papers

 

Many self-employed house cleaners start with a simple business structure. The two most common business forms are the sole proprietorship and general partnerships. Both are considered “informal” business structures because they don’t involve setting up formal paperwork such as articles of incorporation or partnership agreements with state and federal governments. They are both very easy to set up and maintain. Yet, like everything else in life, “easy” comes with both benefits and downsides. Some pros and cons of these two simple business forms include:

Sole Proprietorship

The sole proprietorship is the most common form of business structure. A sole proprietorship is a business controlled and owned by one individual and is limited to the life of its owner, so when the owner dies or dissolves the business, the business ends. The owner receives the all the profits and takes all the losses from the business. The owner alone is responsible for the debts and obligations of the business. Income and expenses of the business are reported on the sole proprietor’s individual income tax return and profits are taxed at the sole proprietor’s individual income tax rate.

In states such as Arizona, Colorado, Oklahoma and Washington, married couples can form sole proprietorships. In other states married couples can only form general partnerships.

Sole Proprietorship Pros

• A sole proprietorship has less paperwork and lower costs.
• Decisions are made by the owner.
• There are fewer reporting requirements to government agencies.
• Corporate “double tax” is avoided.
• Business losses may be taken as a personal income tax deduction to offset income from other sources.
• All profits are taxed as income to the owner at the owner’s personal income tax rate.
• Ability to do business in almost any state without a lot of red tape.

Sole Proprietor Cons

• Sole proprietorships cannot take advantage of certain tax benefits the US Internal Revenue Service (IRS) Code gives to corporations, limited liability companies and limited partnerships.
• The business terminates upon death of the owner.
• Investment capital is limited to what the the owner can raise.
• Loans are based on credit worthiness of the owner.
Owner’s assets are subject to business liabilities. For example, if the owner’s work vehicle is involved in an accident, the owner’s personal assets like bank accounts, real estate or other vehicles may be taken by the court to compensate the injured party.

Sole Proprietor Tax Notes

• Income from the business is taxed as personal income by the IRS (use Form 1040, Schedule C).

Sole proprietors must pay self-employment tax each quarter to the IRS (and in many states). Use Form 1040, Schedule SE.

• A sole proprietor who does not expect to have employees is not required to apply for an Employer’s Identification Number (EIN) from the IRS. The EIN is also known as a Federal Employer’s Identification Number (FEIN). However, it is a good idea to get a EIN for other business purposes, like opening bank accounts, loan applications and state and county registrations.

 

General Partnerships

A general partnership business is another form of self-employment, similar to a sole proprietorship. However, general partnerships include two or more people (for example, a married couple), who operate the business together. In general partnerships, all partners share equally in the right and responsibility to manage the business. All partners are responsible for all debts and obligations of the business. How profits and losses are handled, who manages what areas of the business and other issues about the partnership are usually defined in a written partnership agreement.

It is extremely important for people starting a general partnership to draw up a written agreement before starting the business. Hash out as many details about how the business will be run as possible. No detail is too small (like what happens if a partner is frequently late for work) or too scary (like what happens if a partner is injured in a car accident and can’t work). Making a written plan is the first step in setting up solid lines of communication that will lead to the partnership’s success. This is especially true if the partners are married or are related to one another.

General Partnership Pros

• A general partnership is easy to organize and has few start-up costs. In many states, partnerships can be started through oral or written agreements.

• A general partnership is funded and managed by all partners.

• A general partnership can have a semi-formal legal position from the individual partners . For instance, in some states a general partnership may own assets, contract in the partnership name, may sue and be sued in the partnership name and may file separate bankruptcy.

• Liability is shared by all general partners, not just some of the partners.

• General Partners can take business losses as a personal income tax deduction to offset income from other sources.

General Partnership Cons

Each general partner is personally liable for all the obligations of the business, not just his or her share. For example, if a work vehicle is involved in an accident, each partner’s personal assets may be taken by the court to help compensate the injured party.

• Each general partner has the power to act on behalf of the business, which requires that partners be chosen with great care.

• The general partnership has no continuity of life. If any partner dies or becomes incompetent, the partnership is dissolved.

• All general partners must pay tax on their share of partnership profits, although profits may be kept in the business.

• A general partnership has more opportunity than a sole proprietorship but less than a corporation, to take advantage of certain business legal benefits.

General Partnership Tax Notes

• For federal income tax purposes, a General Partnership is not a separate from the partners themselves. Each individual partner is subject to the same reporting requirements and tax rates as the Sole Proprietor.

• General Partnerships are required to apply for an Employer’s Identification Number (EIN), whether they have employees or not.

General Partners must pay individual self-employment tax each quarter to the IRS and in some states.

• The General Partnership files a yearly Federal return using IRS Form 1065. Many states have similar yearly partnership forms.

Limiting Liability

Sole Proprietorships and General Partnerships are two popular ways to get started with a residential housecleaning business. Both forms of business have pros and cons that you need to be aware of when you start your business. If you plan to have employees someday, you can start with those simple forms and change the business form to an LLC (Limited Liability Company) or Corporation before you hire.

The greatest drawback of both business forms is they leave you open to full legal and financial liability if something goes wrong in your business such as major damage to your customers property (like bleach spills on carpet) or being accused of theft. As a self-employed housecleaner, an umbrella liability insurance policy that covers you up to a million dollars plus a janitorial/cleaning bond will help to reduce your liability and help you sleep at night.

How you choose to set up your business is up to you. Choose wisely.

 


Just Getting Started?

USA map of state start-up lawsUse this full map of US state and city laws to help you:

  • Apply for a business name
  • Get a business license
  • Register to pay taxes

Just click on the map to find your state and get started.

 


How have you set up your cleaning business?  Share your experience in the comments below⬇︎.

2 thoughts on “Two Common Ways to Start Your Cleaning Business”

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    Dominique Naugle

    Hello Judith my name is Dominique Naugle and i’m interested and starting a cleaning business im doing alot or researching and want to know what do you recommend as far as with me being a beginner..

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