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Selecting the Right Business Structure

Linda Jenkins, August 26 2016

DBA or S Corporation? Selecting the right structure for your company is one of those critical legal decisions that an owner should make when forming a business. It's important in a number of different ways. Your business structure will determine how much paperwork your company needs to generate for legalities, how much you will pay in taxes, and how much liability you will face personally.
startup structureThis choice will also affect your ability to obtain sufficient funding. We've presented the most common structures below for your convenience.

Different Types of Business Structures

Four primary legal entities are available. Each of these is explained below.

Sole Proprietorship- By far the most popular type of entity, the sole proprietorship aka "doing business as" or DBA,  involves ownership by one person. Since only one owner is involved, this is the simplest type of structure to set up and the easiest to maintain. Any liabilities, debts, and taxes are the sole responsibility of the owner.

Limited Liability Company- The Limited Liability Company, also referred to as a LLC, incorporates several aspects of both a partnership and corporation while being open to individuals as well. This is an attractive option since the owners of a LLC are shielded from any personal liability. In particular, the LLC is an attractive option for sole proprietors with high exposure to liability and it makes perfect sense for them to use this specific entity in order to protect themselves. For example, self-employed physical therapists are at greater risk for liability issues and therefore, they might want to select a LLC in order to protect their personal assets.

Partnership- A partnership is the term used to define a venture that involves two or more people who are responsible for operating a company. Typically, the partners reach an agreement on how the business will be run in all aspects. Not only do partners share in the profits, but also, they share in any liabilities or debts that accumulate as a direct result of ownership.

Corporation- The corporation is considered a separate legal entity in its own right. It includes privileges of its own that are separate from the privileges that the owner might have. It also has separate liability issues from its owners. This means that the owners are protected from liability issues resulting from business activity, and the corporation is solely responsible for taxes accruing in direct relation to this activity. The primary disadvantage of a corporation is that it can be expensive to create and run. Therefore, detailed record keeping is essential.

Within this entity, two options exist. The S corporation includes one level of taxation for the business, but it includes specific limitations as to the number of stockholders as well as the type of stockholders that can exist. The traditional C corporation involves double taxation, but it also includes a more flexible tax planning approach as well as the ability to shield its stockholders from tax liability.

Understanding the differences among the various types of structures is the first step in creating a successful business. The next step requires proper planning. As the company grows, it might be necessary to revisit the chosen structure and select another. In particular, a small business owner has the potential to move or transfer from a sole proprietorship to a partnership or LLC quite easily.

Important Aspects for Choosing the Best Entity for Your Needs

In order to make the right selection, it helps to understand the following five terms:

Legal Liability- The amount of legal liability facing a business suggests the need to incorporate it or form a LLC in order to protect the owner. Protection of personal assets is essential in the event that a judgment is issued against your company due to a lawsuit. However, the nature of the business must be taken into account since it might preclude the need to incorporate or form an LLC due to a low risk of liability. If you can afford the potential liability risk, then a sole proprietorship may be a reasonable choice. This is primarily due to the fact that lower levels of potential liability can often be covered by insurance.

Tax Implications- The tax implications vary depending on the type of structure selected. In fact, corporations have a greater number of tax options over partnerships or proprietorships. For example, owners of a corporation do not have to pay any personal income taxes on any profits that they do not get. Plus, they have a lower federal corporate income tax rate on the initial $75,000 of income received by the corporation. On the other hand, unincorporated businesses have a higher federal individual income tax rate on the same initial $75,000 of income. Moreover, the owners of an unincorporated business will also be required to pay income taxes on the net profits.

Expenses- The expenses attached to a startup vary a great deal, and depending on the type of structure that you select, special fees might also apply. Setting up a LLC or corporation involves filing fees for documents; they are more expensive to run since documentation and proper records must be maintained on a quarterly basis, special rules must be followed, and officers must be elected to run the company.

Individual Needs- Your specific needs should be carefully taken into consideration. Are you able to work with others? Do you need to maintain control in order to hold onto your sanity? Do you know what it is that you are looking to accomplish from running your business? Each of these questions should be carefully considered prior to making the decision as to which legal entity to set up.

Flexibility- Even though you might select the right type of structure at start-up, it is important to realize that flexibility should be part of the plan. As your business evolves, it might be necessary to transform from one type of entity to another.

Since no two businesses have the same needs and no two owners have the same expectations, finding the right structure isn't always easy. Nonetheless, help is available offline through attorneys and CPAs, and online through a wealth of information that will point you in the right direction.

If you are strapped for cash, consulting this legal guide by Attorney Fred Steingold, can save you thousands of dollars in legal fees. It covers many questions you will likely have in regards to business structure, permits, licenses, leases, raising funding and avoiding legal disputes:

small business legal guide

If you are interested in incorporating or forming a LLC look no further. As the internet leader in incorporation, BizFilings provides affordable, easy-to-use business formation services in all 50 states.

 

Read more articles on small business strategy.




Top 7 Reasons You Need to Join the NFIB

Linda Jenkins, August 04 2015

 

national federation of independent business membershipWhether you're starting, growing, or planning to sell your business, you need the proper resources and support to make your operation profitable. By joining the National Federation of Independent Business, you join a network of 350,000 independent and small business owners united by one goal: to own, operate, and grow a successful company. Gold Alliance Group, Inc. is an authorized affiliate of the National Federation of Independent Business.

NFIB is a small business association that provides research, networking, discounts, online resources, and state and federal lobbying for small businesses across the U.S. Founded in 1943, the organization supports entrepreneurs by providing the advice, legal resources, and online tools needed to start, manage, and expand a business. If you haven't heard of NFIB.com, here are seven good reasons to consider becoming a member.

 

1. Save on Business Products and Services

As an NFIB member, you'll get great discounts on computer systems, operating supplies, credit card processing services, cellular phone plans, online marketing, tax filing, payment processing, and repair services. You'll also save up to 70 percent on shipping and printing costs. Considering buying a vehicle for business use? The NFIB offers a $500 rebate on select Chrysler vehicles. By becoming a member, you can save over $5000 on products and services you're already using in your business.

2. Affordable Personal and Commercial Insurance

Regardless of the size of your company, protecting your business should be your first priority. Members have access to key insurance solutions like Business Owner's Policy, Business Auto, and Worker's Compensation. You can request and receive quotes on commercial insurance plans from multiple providers. If you're in Texas, joining NFIB/Texas Mutual Safety Groups will entitle you to an 11 percent discount on commercial insurance premiums. Your membership also gives you access to reduced-rate personal insurance solutions, including:

  •  Health insurance (individual and group)
  •  Life insurance for you and your employees
  •  Home and auto insurance


As an NFIB member, you'll receive regular updates on the latest news and trends in small business insurance.

3. Free HR Solutions

NFIB's HR support services save you time managing your employees so you can focus on growing your business. Just a few of the free HR solutions offered to members are:

  •  Legal guides (including a guide on implementing the Affordable Care Act)
  •  Hiring forms
  •  Sample interview questions
  •  Human Resources information


4. Advocacy

NFIB is the most powerful advocate for small businesses in the U.S. The organization has been involved in numerous key cases at both the Federal and State levels. The NFIB was named among the top ten "Amicus All Stars" in 2013.

5. Member Badge

By displaying the NFIB member badge on your website, you boost your business' profile and credibility. Customers and other business owners will see you're a dues-paying member of the NFIB when they visit your site. Anyone wanting more information about the NFIB and its members can click on the badge, which will take them to the NFIB's website.

6. Stay Informed on Industry News

Many business owners find keeping up with business news and trends a challenge, especially with all of the other profit-generating tasks that need to be completed in a day. As a member, you'll receive regular updates about economic issues that could affect your business. You can concentrate on growing your customer base knowing that they will keep you informed of any news that could negatively impact your bottom line.

7. Business Advice

NFIB provides the tools and resources you need to make your business successful, from providing daily business advice to hosting live Q&A sessions with business experts. As an NFIB member, you'll also have access to webinars on a wide selection of business-related topics, including marketing, finance, and tax-related issues. NFIB's legal resources help you ensure your small business is compliant with insurance rules, labor laws, and other regulations. Sign up as a member, and you'll receive daily business advice, delivered directly to your inbox. Business advice topics range from marketing and advertising to government issues and contracting. The NFIB provides a wealth of valuable information to help you manage and grow your company.

Start saving now: Save on tools and services that you use everyday.

 




Is Your Company Protected by a Buy-Sell Agreement?

Linda Jenkins, February 21 2015

 

 buyout agreements book

Have you ever thought about what would happen to your business if your co-owner suddenly died or decided to voluntary leave for whatever reason? Would his or her spouse be protected? Could you agree on buyout terms?

Any business that has co-owners needs to have a Buy-Sell Agreement. This legal document protects the interests of all owners and their heirs should a death, divorce or voluntary sale occur. The best time to draft a buy-sell agreement is upon startup, and it should be revised as new owners enter the business, or otherwise, on an annual basis to update the company's projected value. Drafting this document and having co-owners sign the agreement is important because it:

  •  Reduces legal disputes (by having partners agree ahead of time on terms)
  •  Protects co-owners and heirs (by ensuring a fair value for their interest in the company)
  •  Protects the company (from taking on unexpected partners, ie. a spouse or relative of a deceased co-owner)
  •  Protects the company's financial future (if a portion of life insurance proceeds are alloted to cover the company upon a co-owner's death)

If you have business partners and have not yet taken the time to draft a Buy-Sell Agreement, be sure to consult with your business attorney as soon as possible to complete this very important document.

You should also prepare yourself for legal discussions about your business by reading up on how agreements should be drafted.