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Common Business Structures

A Sole Proprietorship is a one-person business. There is no paperwork to fill out to accomplish this. The profit or loss from the business is carried to the personal tax return of Sole Proprietor. The Sole Proprietor is liable for all debts and other liabilities of the company.

A Fictitious Name Registration (DBA = doing business as) is required in most states. You must file your fictitious name registration before starting the operation of your business. In some cases, it must be filed within 30-40 days of your first business transaction. In addition, several states require that you publish your DBA statement in a local newspaper, and then file proof of publication with the proper government office. The purpose of the publication requirement is to ensure the public is informed of new businesses in the area, their legal name and ownership.

A Partnership has two or more people involved. The profit or loss is divided between the partners and carries to their personal tax returns. Each partner is personally liable for the debts or other liabilities of the company.

A Corporation is a separate and distinct legal entity. That means that a Corporation can open a bank account, own property, and do business all under its own name. Corporations are managed by a Board of Directors which is responsible for making major business decisions and overseeing the general affairs of the Corporation. Directors are elected by the Shareholders of the Corporation. Officers who run the day to day operations of the Corporation are appointed by the Directors.

The main advantage of the Corporation is that its owners, known as Stockholders or Shareholders, are not personally liable for any of the debts or liabilities of the Corporation. For example, if a Corporation gets sued or it is forced into bankruptcy, in most cases, the owners will not be required to pay the debt with their own money if the assets of the corporation are not enough to cover the debts. The creditor cannot, in most circumstances, go after the Shareholders, Directors or Officers of the Corporation to recover any loss.

Investors in business often risked everything they had if the new business turned bad. When the company was out of money and didn’t have the cash to pay creditors, the investors had to make up the difference with their own money. With the advent of the Corporation, investors could avoid this type of liability by forming a Corporation and as a result more people are more willing to invest their money in business ventures. The formation of Corporation as a business entity can help reduce your taxes but more importantly you can provide for peace of mind by protecting your personal assets.

There are two types of Corporation. The IRS allows for a Corporation to be taxed either as a C Corporation or as an S Corporation.

A C corporation’s profits are taxed at two levels which is commonly referred to as double taxation. A C Corporation pays the corporate tax on its corporate income then the C Corporation distributes profits as dividends to shareholders who pay income tax on those dividends.

The way to avoid the double taxation of a C corporation is to make a special election with the IRS to be taxed as an S Corporation. This means that your income will be taxed like a partnership or sole proprietor. That way there’s only one level of taxation. Corporate profits and losses are passed through to the owners who pay the taxes on the profits at the individual personal tax rates instead. You can use income shifting to take advantage of lower tax brackets

Let’s look at an example:

For purposes of this example we will assume that ABC Company is a sole proprietorship and has an income of $100,000. As a sole proprietorship the tax rate is 25%. If it were ABC Corporation instead, let’s assume business owner takes $50,000 in salary and leaves $50,000 for profit. The federal corporate tax rate would be (15% of $50,000) The personal tax rate is at (15% of $50,000) as well. This is a distinct advantage of forming a Corporation.

Other Advantages:

Corporations can provide employee benefit packages for your employees. You can lease assets to your Corporation. The business pays a lease fee and can claim rental income and expenses including interest, depreciation, repairs, maintenance, insurance and administrative costs.

In a Corporation there are no restrictions on the amount of capital or the operating losses that a Corporation may carry back or forward to subsequent tax years. A sole proprietor can’t claim a capital loss greater than $3,000 unless he or she is offsetting capital gains.

The money the sole proprietor earns is subject to self-employment taxes. The taxes are currently 13.3% on the first $106,800 of income. In a Corporation only salaries are subject to such taxes, profits are not. This can save you thousands of dollars a year.

Let’s look at another example:

If a sole proprietor earns $80,000; 13.3% tax would have to be paid on the entire $80,000. Let’s assume that the Corporation also earns $80,000 but $35,000 of that amount is paid in salary. $45,000 is deemed his profit in this case his self-employment tax would not be paid on the $45,000 profit. This saves you over $5,000 per year. It’s important to note that you should pay yourself a reasonable salary and take advantage of all the tax benefits that a Corporation offers you. Don’t forget however there are responsibilities of owning a Corporation and the Corporate Book is probably the most important one of them. We will talk about that later on.

There are differences in each business structure and you should choose the one that best meets your business needs. The biggest difference between a Sole Proprietorship, Partnership or DBA and the Corporation is taxation. You want to weigh all of your strengths and weaknesses before you decide which business structure to use. Remember that a Sole Proprietor or Partner in a business is liable for all the costs of operating the business. This means that they are liable for all business debts too.

A S Corporation helps avoid double taxation. This occurs where the corporate profits are taxed and then the dividends are sent to the shareholders and are taxed to the shareholder’s personal tax return as well. The most important thing to remember is that a C Corporation and a S Corporation can shield you from business liabilities. A Sole Proprietor or a Partner in a Partnership are personally responsible for the business debts. In a Corporation the owners are not responsible for most business debts or liabilities if the business fails.

An important issue to discuss is the Corporate Book. It is a 3 ring binder documenting all transactions or meetings carried out by the Corporation. This means everything from opening a bank account to selling property. The Corporate Book is the corporation’s main responsibility. Usually the Secretary or Treasurer of the corporation maintains the Corporate Book. Without documenting the Corporate Book you could possibly lose your status as a Corporation and would be subject to the appropriate tax. This is referred to as piercing the corporate veil.

Under certain circumstances individual shareholders may be liable for corporate debts, for example, if a shareholder personally guarantees a corporate debt then she or he will be liable for that debt if the business fails. If corporate funds are intermingled with personal funds this puts you in a position where the corporate veil can be pierced. Not documenting the Corporate Book can also cause the piercing of the veil. This means the shareholders would be personally liable for all debts and other liabilities of the corporation. There are strict rules and regulations governing corporations and the most important is maintaining the Corporate Book.

For businesses that want to avoid the regulations of a Corporation, the Limited Liability Company was developed. The Limited Liability Company, or LLC, was developed to protect the business owners from personal liability if the business failed. It is a type of business entity that combines the personal liability protection of a Corporation with the tax benefits and simplicity of Partnership.

The LLC has the same tax benefits as a S Corporation with limited liability of the business debts. The owners are called Members. There is no limit on the number of members allowed. LLC’s function similar to partnerships with flexibility and the pass-through of tax on profits to personal tax return of Members.

A Limited Liability Company (LLC) is a type of business ownership that combines several features of corporation and partnership structures. It is not a corporation or a partnership. Owners are called Members not Partners or Shareholders. The number of Members are unlimited and may be individuals, corporations, or other LLC’s.

Members of a LLC have the liability protection of a Corporation. Members cannot be held personally liable for debts unless they have signed a personal guarantee. A LLC exists as a separate entity much like a corporation.

Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is x/x, the LLC has much more flexibility. The LLC business structure requires no Corporate Book reflecting Minutes or Resolutions and is easier to operate than a Corporation.

All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy. Members with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure.

A sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply.

Setting up a LLC may not be as simple as a sole-proprietorship, however, the process is much less than a corporation. There are two steps to becoming an LLC. The first is

1. Articles of Organization: If you plan to set up a Limited Liability Company, you will have to file Articles of Organization with the Secretary of State and pay the required fees.

2. Operating Agreement: The Operating Agreement defines your company arrangement such as profit sharing, ownership, responsibilities, and ownership changes. Each state has different rules governing the formation of a Limited Liability Company. Some states will want a publication notice with the local newspaper that a company has been formed.

A LLC is created by individual state statute. The IRS uses tax entity classification, which allows the LLC to be treated as a corporation, partnership, sole proprietor depending on elections made by the LLC and the number of members.

Multi-member LLCs can either be a Partnership or Corporation including S Corporation. To be treated as a Corporation a LLC has to file Form 8832 Entity Classification Election and elect to be taxed as a Corporation. A Multi-Member LLC that does not elect this will be classified under federal law as a partnership and taxed accordingly.

For more information on this or other business structures send us an email at [email protected].

Importance of Traffic Generation for A New Online Business

Being able to make money online is by no means a simple undertaking, and requires a considerable amount of planning and effort. With the right tools and know-how, it is easy to make money online, and enable an online business to flourish. There are a number of things that need to be taken into consideration before the online business can be successful, the most important being traffic building.

Traffic building is essentially directing online traffic towards the website or blog for the online business. It is a top concern among online business owners, as it holds the key to make money online. For any business to be successful there is need for customers, as they bring income to the business. It is therefore important for any online business to target and direct traffic towards the online business.

Most of the businesses that have been able to make money online attribute this to the fact that they employ superior traffic building tools. These have for the most part led to the growth of a lot of online businesses, and have enabled many business owners to make fortunes out of their businesses. It is therefore important to look into what tools successful online businesses employ to enable success.

There are a number of ways to direct traffic to one’s website, and these vary from the free to the expensive. The business owner looking to make money by starting an Internet business needs to find out what traffic building tools suit his particular kind of business, and how he can begin to take advantage of these tools to see the growth of his business.

It is important to remember that a traffic building tool that works for one website is not automatically guaranteed to work on yours. It is important to pay attention to the tools that will fit your particular business, and to determine this, you may ask for professional assistance, or simply talk to other online business owners.

Traffic building for an Internet business can sometimes turn out to be an expensive option. This is particularly so for an online business that is just starting out, or those that operate on a tight budget. It is therefore also important to figure out the amount of money that is at the disposal of the business for the purpose of traffic building. This is important so as to avoid later problems.

By conducting research and talking to other Internet business owners, it is easy to get an indication of how much it would cost your business to take advantage of traffic building, as well as find the most effective tool for this purpose. Extensive research is required to ensure that the business owner is able to make the correct decisions and be able to make money.

Traffic building is arguably the most important part of web design and Internet business, and so needs to be treated as such. A very small number of Internet businesses are able to survive without the use of traffic building, and so it is necessary to take this factor into serious consideration when starting an Internet business if you want to be successful.

Should I Start A Business?

Why Should I Start A Business?

This is an issue that’s vexing a lot of people right now, particularly given the present economy. There are some who have always wanted to be in business for themselves. There are others who sense that it is the only alternative left to them because they can’t replace the job they lost.

Either way, the “why” can be a complicated question. It is also one you need to answer before you actually take steps to get going. Usually people start a business, because they want to be more independent, they feel they can earn more money, they want shorter hours, or have a hobby that they feel could make them money and permit them to do the thing they love.

So let’s start with a short dose of reality. If you are considering starting a business to earn more money, take note of the fact that only one out of 16 business’s survive the first year. I don’t tell you this to scare you off, but to make sure that you are grounded in the fact that opening a business is more then just hanging a shingle.

When comparing it to a job, just know that it’s a lot harder then it looks and the “why” must sustain you through plenty of difficult times. Starting a business isn’t easy. So be prepared for the challenges that lay ahead.

Because it is tough, you want to be sure that if you’re considering converting a hobby to a business that you don’t destroy the thing you love. I was a guitarist and loved to play until I was doing the night club circuit every night for months on end. I got tired of playing the exact same songs again and again and for a long time lost interest in playing music because of it.

So when you ask yourself why should I start a business? You should also ask yourself, am I cut out to be in business for myself? This is a tough question and deserves taking the time to ensure you have really answered it.

What Kind Of Business Should I Start?

OK, so I didn’t scare you off using the, business is tough, line. You’ve decided you intend to go ahead and start a business anyways. Now the question is what type of business should you start? We already discussed a few possibilities, one being something you already take pleasure in doing.

If you love to fly fish, it may make sense to open a business related to your interest. It is especially true if you are highly knowledgeable about it and have a good sense of how you would like to approach a business like that. One caution I’d have for you, is that you need to make sure that your hobby has a big enough market and you have a way to make it a moneymaking business. Just because you love it, doesn’t mean you should risk your life savings if you can’t win in the marketplace.

The second business option could be to do something you know. If you have been employed in the HR field for many years, you might want to consider opening an HR consulting practice. Just as with the fly fishing business, you need to make sure there is a market for what you have to offer and adequate business to make a living at it.

If neither of those choices are available to you, or you just want to do something unique. Be cautious, because your lack of knowledge of an industry can be a costly education. So, tread carefully here, and make sure you take plenty of time to study your potential market before you get involved. I would suggest you utilize tools like Google to check out top business opportunities and even take a look at an old fashioned Yellow Pages for ideas of a business that you may have an interest in. See what sparks your curiosity, then dig in and do your homework.

What Is The Cost Of Starting A Company?

Assuming you have found the company of your dreams, there will be costs to get your business started. I’d suggest you check out some of my previous blogs about business planning, to better understand all of your true costs to get going. But to start up a business the costs are generally minimal unless you’re in a business that requires licensing and/or certifications.

In those cases, you’ll have to add those kind of expenses into your start up proforma. But your basic costs will include a license with in the state that you intend to begin the business, together with incorporation or other forms of entity costs. You’ll likely need a phone line a computer, Internet service, office supplies and a host of other small, but necessary things.

To get a handle on these costs, you will want to check with your secretary of state, they’ll have a detailed list of what they need, including taxing authority information. For the other start up expenses, you should ask your local Chamber of Commerce, or an industry association in the field that you are interested in. Feel free to ask them questions, that’s what they’re there for.

The more you learn about costs and the type of company you intend to start the better chances you’ll have of succeeding in your new business venture.