Soliman Law Group - Avoiding common Business Start-Up Missteps
So you’re thinking about stepping off the ledge and becoming an entrepreneur? Soliman Law Group can help!
Owning your own business can be an exciting and rewarding adventure provided that you do some basic work on the front end to give yourself the best chance of a successful outcome; just like painting a room in your house, the end product comes out significantly better when you invest the upfront time to carefully tape moldings and cover your furniture. The same goes with your business. One of the first questions you’ll need to answer is “what kind of business structure am I going to use?” This is essential, as there are tax, liability and operational considerations with the various legal structures.
• Sole Proprietorships. A sole proprietorship is a very simple business structure with little to no legal documentation being
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If you are going to raise money from intuitional, angel or high net worth investors, a C Corporation is often used. C- Corporations can be formed under the state laws where the business is located or in another state, such as Delaware, where there are friendly corporate laws for Corporations. A shield is provided in a Corporation to the founders/investors against personal liability from creditors.
• S corporations. If you have less than 100 shareholders, this may be a good structure for you to choose. S corporations may have favorable tax treatment, (federal and state) as well.
• Limited Liability Corporations. LLCs are effectively a hybrid of a corporation and limited partnership and may have some tax advantages over C corporations.
• Limited partnerships. These are often formed to hold investment real estate and also for private equity firms and hedge funds.
Call us at 888-400-0833, before you get too far into your new business so we can set you on a path where you’ve got your basic structure and its requirements fully
A1a: The Sole Proprietorship is the most common business form in the U.S. It offers the advantages of no-cost, easy startup, and full owner/operator autonomy with regard to business decisions.
Limited Liability Company (LLC) combines the tax advantages of a partnership with the limited liability aspects of a corporation. LLC’s are governed by the Uniform Limited Liability Company Act (ULLCA). All members of the LLC enjoy limited liability unless there is serious misconduct is committed by said member(s), or a member fails to follow through on an obligation. All this should be outlined in your preformation contract. You will have more flexibility with taxation and options on how to manage the company. It would be advisable to also have an Operating Agreement. This will dictate how management will be hired and fired, division of profits, how to transfer interest in the event a member chooses to opt out or dies. What steps to take in the event of dissociation of a partner, and if it causes the dissolution of the LLC. Most importantly how the members vote in the LLC. The weight of the members vote is in accordance with the member’s capital
• Income Taxes: S- Corporations are tax paying entity, the business files tax returns but not taxed on earnings. The stockholders claim losses or profits on their personal tax returns.
There are different aspects of each type of business structure, sole proprietorship, partnership, LLC, and corporation. A sole proprietorship is “a business owned and operated by a single person. The business has no legal existence from its owner” (Rogers, 2012). This also means that the sole proprietorship is liable for everything, debts, lawsuits, taxes, etc. In a partnership, “an association of two or more competent persons to carry on a business as co-owners for profit. The business itself is not a legal entity” (Rogers, 2012). In a partnership any members of the partnership, which has to be more than two persons, can be held liable for the same as a sole proprietorship, the debts, taxes, etc. There are also limited partnerships which will be created when filing with the state, with one general and at least one limited partner. This makes it so the limited partner will not be personally liable for the debts of the business. An LLC, Limited Liability Company, can be formed via an application to the state and will try to combine the advantages of partnerships and corporations. Therefore, an LLC will protect an individual more than a partnership would. Lastly, a corporation is “a business entity that is formed through application to the state, which allows shareholders limited liability. Corporations have the legal status of persons and a corporation will also protect the individual, much like an LLC would.
The Internal Revenue Service refers to an LLC with pass through income as a disregarded entity; in other words, it is not recognized as an entity separate from its ownership. When it comes to simple record keeping an LLC has fewer record-keeping and reporting requirements than a corporation or being a sole proprietorship.
Limited liability companies are those companies who have the form of the partnership, in which all the partners have the right to participate in management and have the limited liability for company debts.
The second alternative is a corporation. One can form as an S corporation of C Corporation. “A C corporation is double-taxed. The corporation pays taxes, as do the company’s shareholders. S corporations are single-taxed. All taxation and business expenses are paid for by the company’s shareholders” (Small Business – Chron.com, 2015). There are some advantages to this form. You are not personally liable for lawsuits and debt. It is easier to attract investors for your business. S corporations are “limited to a maximum of 100 shareholders and a C corporation can have unlimited shareholders” (Small Business – Chron.com, 2015). The corporation is “a stand-alone entity, which means you are not personally liable for the assets and debts of the business” (Small Business – Chron.com, 2015). “The stand-alone entity also separates tax liabilities, which is another advantage. This means that the corporation taxes are separate from your personal tax liabilities. As a business owner, you are responsible for paying taxes only on the money the corporation pays you in the form of a salary, commission or dividends--this is on your personal tax return. The corporation is responsible for paying corporate taxes (at the corporate tax rate) on any profit the company makes” (Small Business – Chron.com, 2015). There are also some disadvantages. First, the costs can be a disadvantage. “One of the primary disadvantages of a corporation is the costs for running a corporate form of
The limited liability partnership (LLP) is another type of partnership. LLP is “a partnership consisting of one or more general partners and one or more limited partners” (p. 554). “It was created to limit the personal liability of the partners of "losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision” (Nickels, McHugh, & McHugh, 2013, p. 119). This business form also “allows a partnership to continue as a pass-through entity for tax purposes” (Miller, 2014, p. 554). However, limited liability partnership is not recognized as a legal business structure in every state, unlike the general partnership, In addition, taxing authorities in some states recognize the
In an S Corporation, profits and losses can pass through to your personal tax return. The business itself is not taxed. Only shareholders are taxed. However, any shareholder employees must pay themselves reasonable compensation. The shareholder has to get fair market value, or the IRS could reclassify additional corporate earnings as wages.
When setting up a business, the idea is only a part of the process. It is also necessary to consider the way in which the business itself will be set up in order to function. There are three basic structure which may be used; sole proprietor, partnership
An own family commercial enterprise may be organized as a partnership, limited legal responsibility employer (LLC), an S business enterprise, or as a C organization. even though a C employer has the biggest tax benefits, any dividend profits will be the challenge to double taxation. furthermore, S and C groups are greater complicated business entities and extra taxes, which includes the nation corporate franchise tax, could additionally be paid. A limited legal responsibility corporation with 2 or extra participants is taxed as a partnership, and while preferred partnerships are clean to arrange, they are able to have complex tax consequences.
However, I would not let the possibility of any wrongdoings committed by the company, stakeholders, or employees discourage you from reading more on an LLC. In fact, you will learn some advantages that make this type of venture appealing. For instance, you may continue to be the sole owner of the company if you choose or you could have family and friends invest in the company as limited partners. By doing this, you and the members can elect who will be in charge of performing certain tasks, such as overseeing day-to-day operations. Furthermore, you and the members decide how profits and losses are shared amongst one another. The percentage may be based on capital invested by each member or a mutual agreement. Whichever route you choose, make sure you have it in writing before proceeding.
Today’s business world has many choices for the new entrepreneur to decide from when forming a business. The choices are sole proprietorship, partnership, limited liability partnership, a limited liability company, a S corporation, a franchise, and a corporate form. Development of scenarios portraying each of these forms of business will aid the entrepreneur with deciding which form will be the best choice for the business.
You have five basic choices when setting up business entities: sole proprietorships, partnerships, limited liability companies, S corporations and C corporations. Most small businesses benefit by choosing the LLC structure because it protects you from personal liability and your profits pass through for simple taxation treatment, instead of being double-taxed like regular C corporations.
When starting a business an individual needs to know what type of business structure they will have. After looking at all the types of structures for a business, I decided to go with a sole proprietorship business. I choose the sole proprietorship structure because it is the simplest structure out of all of the structures. The owner has complete control to run the business as they would