STARTING A BUSINESS
Volumes have been written on what form your business should take as you start out. Some will tell you, you need to incorporate others will say that a partnership or a proprietorship is sufficient. Here are some good rules of thumb:
A Proprietorship is simply you operating under your name for purposes of liability, taxes, etc. It is the easiest form of business to start and only requires that you keep your business related activities itemized, preferably in a separate checking account and separate set of files, so that you can determine which activities are business related and which are not.
A Partnership operates much the same way but it is advisable that you and your partner have a partnership document that spells out what your duties, responsibilities, obligations and entitlements are under your agreement. This saves problems if one of you were to die or the two of you were to break up.
A limited partnership is one in which one partner has a more limited role and has a limited liability if the partnership has problems. It to requires a partnership agreement and should be spelled out in detail and signed by all of the partners before you begin business.
A limited liability corporation allows people to operate like a partnership with the protection of a corporate status. In a proprietorship, partnership or limited partnership there is no separate taxable entity. All income and expenses are attributed to the individuals. Similarly any obligations or liabilities for negligence, contracts, etc., are attached to the individuals. In the corporation there is a separate taxable entity that would have to file taxes, pay it’s own expenses and to have it’s own responsibilities for negligence and the like. A limited liability corporation does not have a separate tax structure you are still taxed like a partnership but you are protected from personal liability like a corporation.
A Subchapter S Corporation is very similar to a limited liability corporation but the tax returns are informational returns. Income and expenses are passed through to the individual stockholders. It is a separate corporation so if your company got into problems you may not lose your personal assets, your house, etc.
A regular C Corporation is a separate entity that has its own income and expenses, its own obligations, federal ID #, employees, assets, etc., and you will wear one of several hats in dealing with that company. You may be one or more of the following: (1) member of the Board of Directors.(2) a stockholdersor an employee.
Stockholders elect the officers to serve on the Board of Directors.The Board of Directors conduct corporate business and makes major corporate decisions that are recorded in the corporate minute books. The Board also declares dividends. You can be a stockholder and not an officer or member of the Board of Directors. You can be on the Board without owning any stock. And you can be an employee of a company without being a stockholder or director.
BUSINESS STRATEGIES
– You want to be able to transfer the business when need be. From partner to partner, stockholder to stockholder, parent to child or otherwise. Buy-sell agreements, first refusal options, and estate plans will guarantee that you do not end up in business with someone you do not work well with. And they can contribute to good tax planning as well.
– You need to be sure that death or disability do not cripple the business. Insurance and properly funded buy-sell agreements will help here.
– Liability is always a concern of any high-risk business. The business form can protect your personal assets like your home and car, from being seized in the event the business is liable for something serious. Insurance can help here too but beware the insurance agent just looking for a sale.
– Successful businesses set strategies to take money out at the lowest tax rates. Pension plans, benefits packages and leaseback schemes are all legal and proper if done right. You can own property for example, and lease it to your business allowing you to take rental payments out of the business each month without incurring payroll taxes on the payment.
– More sophisticated strategies include parallel corporations that can serve as feeder companies that allow you some flexibilities in your income and expenses.
– Routine business checkups can also save money. For example a good collections process will improve your bottom line and a review of your invoices/purchase documents can guarantee the maximum dollar on collections including attorneys fees. Other areas that need frequent review include your debt to equity ratio, workers compensation policies, state and federal tax planning, personnel policy manuals, employment contracts (including noncompete clauses and buyouts) not to mention a review of your books and records including minute books, leases, etc. Remember: Saving $10 is a net of $10. If you run on a profit percentage of 25% then saving that $10 is the same as increasing your sales by $40! Where is your time better spent? Increasing sales or cutting costs?