Small Business Tips

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Which Business Entity is Right for You? (Part 3)

PART 3 — LIMITED LIABILITY COMPANIES

Limited Liability Companies, or LLCs, combine several features of Corporations and Partnerships, but are neither. Often people call them “limited liability corporations,” but that is incorrect. The owners of an LLC are termed “members” rather than partners or shareholders. The number of members is unlimited and can be a combination of individuals, corporations or other LLCs.

LLC members are not held liable for the negligence and/or debt of the LLC they have ownership interest in, unless they sign a personal guarantee. Like a corporation, an LLC is an entirely separate existence from the individuals involved.

Another benefit is that there are fewer requirements for an LLC. It is not necessary to keep meeting minutes or record resolutions, as in a corporation, and you are not required to have a board of directors or make officer designations for the members.

Some states do have minimal requirements for an LLC, but what those are varies from state to state. Typically, you are also required to file Articles of Organization and Operating Agreement when registering your business as an LLC.

The designated distribution of income to the members is entirely flexible, leaving the division to be anywhere from 50-50 to 10-90, and, of course, open for division among any number of members.

As a member, you also have much more access to the assets of the company. You can take assets out for personal and/or business use without incurring tax liability. Owners also have more leeway when it comes to writing off business losses when associated with an LLC.

The lifetime of an LLC is limited. If any member dies or files bankruptcy, the LLC is dissolved. Additionally, an LLC is not nearly as appealing to possible investors, so if you are considering going public with you company, or issuing shares to your employees someday, an LLC is not the route you should go.

However, if legal liability protection and one level of taxation are primary concerns for your business owners — who consist of multiple and diverse individuals and/or businesses — than an LLC is probably just right for you.

Part 4: Partnerships
Part 1: Sole Proprietorships
Part 2: Corporations

Sources:
• Entrepreneur.com: Business Structure Basics
• About.com: Limited Liability Company 101
• Start-a-Business.com: Limited Liability Company
• AllBusiness.com: Corporation, Partnership, or an LLC?


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Monday, February 19th, 2018 @ 12:02 AM CDT

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Which Business Entity is Right for You? (Part 2)

PART 2 – CORPORATIONS

Corporations are considered a legal entity which exists separately and independently from the individuals who create and manage it. Only the corporation itself is legally liable for any negligent actions or debts it may produce. The individual shareholders are not liable.

There are a number of requirements for a corporation:

• Must have an elected board of directors or officers
• Must have an operating agreement
• Must keep records such as annual meetings, meeting minutes, record of resolutions and file annual reports.

Advantages
The benefits of a corporate entity are substantial. A corporation has an unlimited lifespan as it is not dependent on the life of an individual, as proprietorships and partnerships are. As long as annual reports are filed consistently, the corporation will remain in good standing.

The flexible transferability of shares is another large benefit. Ownership of shares in a corporation can be sold, transferred, given or inherited by simply endorsing and signing over an individual’s stock certificates. It is not necessary to file deeds or retitle anything.

You would also benefit from the increased ability to raise investment capital. It’s much easier to attract new investors to back your business if it is registered as a corporation because of the limited liability of shareholders and the easy transfer of shares.

Disadvantages
The major disadvantage of registering your business as a corporation is that it can create an additional tax burden. If your business is designated as a C Corporation, then the profits of your corporation are first taxed at the corporate level and then, any distributions to shareholders are also taxed on each individual’s personal income tax. S Corporations, however, are not taxed on the federal level — only the shareholders’ income is taxed.

If your business is large, or headed that direction, you might want to consider establishing your business as a Corporation. This is an especially preferred choice if you want to market your business to a number of investors, because the “Inc.” following the name of your business can be very appealing.

Part 3: Limited Liability Companies
Part 4: Partnerships
Part 1: Sole Proprietorships

Sources:
• Entrepreneur.com: Business Structure Basics
• AllBusiness.com: Corporation, Partnership, or an LLC?


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Which Business Entity is Right for You? (Part 1)

When starting a new business, you will be required to determine the type of business entity it is for tax purposes. There are a number of them out there and each one has different benefits and draw backs. It is best to understand them all before determining which is best for your company.

PART 1 – SOLE PROPREITORSHIPS
The sole proprietorship is the best option for someone who is starting a business in which she will be the only person involved. Many individuals who work out of their home, such as freelance writers, photographers, eBay business owners, etc., opt for a sole proprietorship for their business.

It is considered the quickest and easiest business setup process. There are no prerequisites for your business, an attorney is not necessary, and there are minimal costs for establishment of the sole proprietor entity. In most states, you simply register your business as a fictitious business name. In other words, [your name] doing business as [name of your business].

A fictitious registration does not, however, protect the name you choose for your business – anyone else can use that name. On the other hand, doing so does allow you to use the name of the business rather than your own for business banking accounts and other documentation.

There are some minimal formalities you may need to address when establishing a sole proprietorship:

• Obtain a Federal Tax Identification Number or EIN (otherwise, you will have to use your social security number).
• Obtain an occupancy permit for your place of business, if it is outside your home, depending on the requirements in your state.
• Obtain a business license, if your state requires.

Profits made on a sole proprietorship are considered the personal income of the owner and are taxed as such. It is best to set aside at least 25% (sometimes more) of any profits to pay in quarterly installments to the government. I recommend that you consult with an accountant to determine your best options regarding the taxes on your business.

There are two distinctive drawbacks to this type of business entity. As sole proprietor, the business you start has no separate existence from you. You are personally liable for the debts of the business, which means any debt you may be in default on will end up on your personal credit record. It is best to start this type of business with little to no debt associated with it.

Also, the existence of a sole proprietorship only lasts as long as you do. If a family member wishes to continue the business after you retire or pass away, he will have to register the business under his own name. Of course, as I pointed out, this process requires very little effort.

If you’re just getting starting as an entrepreneur, then I highly recommend that you designate your business as a sole proprietorship. Should the business begin to boom and grow, and you require some help to keep things moving, then you may want to consider other entity options.

Part 2: Corporations
Part 3: Limited Liability Companies
Part 4: Partnerships

Sources:
• Entrepreneur.com: Business Structure Basics
• Start-a-Business.com: Sole Proprietorship
• AllBusiness.com: Corporation, Partnership, or LLC?
• Wikipedia.org: Sole Proprietorship


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By Michelle Cramer
Saturday, February 17th, 2018 @ 12:00 AM CDT

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