What is an independent contractor?

An independent contractor is not just someone who works independently. It is a legally defined relationship between employer and employee.

The Internal Revenue Service lists qualifications for independent contractors. Independent contractors choose who they work for and when; provide for their own licenses, registrations and other legal requirements of trade; and are paid a contracted amount for the job. Termination is based on conditions of the contract.

By hiring an independent contractor, employers avoid paying for benefits usually offered to employees. If the differences in payment go directly into the contractor's pocket, this can be quite profitable (especially if the contractor receives health insurance from another source). Since employers are not obligated to pay taxes for independent contractors, contractors must take care of taxes themselves. (From Martin S. Choosing a business structure. Beyond the standard employer-employee relationship. ADVANCE for Nurse Practitioners. 2002:10(6):43,44, 102.)

What is a sole proprietorship?
A sole proprietorship is the simplest form of corporate structure. Sole proprietorships are the least expensive type of business to start and usually require only a license to operate. They allow for quick decision making, flexibility and management style.

The primary disadvantage of sole proprietorships is unlimited liability. The owner is responsible for the full amount of business debt, and the liability extends to the proprietor's personal assets, including home and car. Financial institutions often ask sole proprietors to put up personal assets as business collateral. (From Martin S. Choosing a business structure. Beyond the standard employer-employee relationship. ADVANCE for Nurse Practitioners. 2002:10(6):43,44, 102.) 

What is a partnership?
A partnership is two or more people who operate as co-owners of a business. The "articles of partnership" outline the contribution and role of each partner and also explain how expenses are handled, the division of profits and losses, and the rights of continuing partners in the event of a partner's departure.

Partnerships are easy to form and relatively inexpensive, and partners are usually motivated to perform their best to earn the greatest profit for the business. This form of corporate structure allows a fair amount of flexibility but, because of the document that describes the partnership, may be more limited than the sole proprietorship. Compared with a sole proprietorship, a partnership generally offers greater ability to gather capital compared and a greater range of skills among the partners.

Unlimited liability exists for at least one partner. When a partner leaves, instability can result: The company may dissolve completely or there may be legal battles over the distribution of assets. (From Martin S. Choosing a business structure. Beyond the standard employer-employee relationship. ADVANCE for Nurse Practitioners. 2002:10(6):43,44, 102.)

What is a corporation?
A corporation is the most complex business structure. Multiple forms must be completed at the state and federal levels. These forms must be filed on a regular basis to maintain the corporation.

With a corporation, liability is limited to the stockholders' fixed amount of investment. The corporation is a separate legal entity, equivalent to a person, and thus liability stops at the corporation. Corporations are also relatively stable structures. They can go on despite the absence of a partner within the corporation. Theoretically, capital is easier to acquire with a corporation, but often initial startups require personal assets of the stockholders as collateral to secure loans.

Corporations may limit an owner's ability to perform certain functions. However, in most states the charters for corporations are extremely broad. There is more government regulation of corporations than sole proprietorships and partnerships. (From Martin S. Choosing a business structure. Beyond the standard employer-employee relationship. ADVANCE for Nurse Practitioners. 2002:10(6):43,44, 102.)

What is an S. Corporation?
The S. Corporation is a small-business corporation, and income is taxed on individual shares. The structure is designed for small, closely held businesses in which only one or two people are involved. The S. Corporation is particularly suited for small health care businesses.

With an S. Corporation, many of the deductions owners normally could not take as an individual are allowable. The portion of a house used for business is completely deductible, including utilities, telephone, gas, insurance and any other costs relating to running a business. Payments made on vehicles can be completely deducted as a business expense, as long as the vehicles are registered under the corporate name. The general idea of the S. Corporation is that all income enters at the top as corporate income and, after all deductions are taken, what is left is personal income. This allows all expenses related to the business to be completely deducted prior to establishing an owner's income for tax purposes. (From Martin S. Choosing a business structure. Beyond the standard employer-employee relationship. ADVANCE for Nurse Practitioners. 2002:10(6):43,44, 102.)

How do I finance my practice?
Grants are the most profitable form of financing because they do not have to be repaid. The search and application process for appropriate grants can be time consuming, however. More than 90% of grant applications are rejected. For the best chance of success, follow the application process to the letter.

Small business administration (SBA) loans tend to offer the most reasonable rates and repayment plans. To learn about available loans, contact your local SBA office (www.sba.gov). Most banks and professional lenders also offer loan packages specifically for small business owners.

Other potential funding sources include personal savings, personal credit cards, federal, state and local governments, friends, family and business associates, and "angel" investors. Personal credit cards may be the quickest and easiest way to access cash if you only need a little for the short term. But fees associated with credit cards may be high. (From Zaumeyer C. Fiancing a private practice. Investigating the options. ADVANCE for Nurse Practitioners. 2003:11(6):56-57.)

How do I get a loan?
When meeting with lenders, be prepared for requests for personal and financial documents. Have copies of your curriculum vitae or resume, income tax returns for the last 2 to 3 years, personal financial statement and business plan. In many cases, lenders want to secure a loan with collateral. Examples of possible collateral include real estate, collectables, stocks, bonds and other securities, medical equipment, office equipment or any other equipment of value. (From Zaumeyer C. Financing a private practice. Investigating the options. ADVANCE for Nurse Practitioners. 2003:11(6):56-57.)