Note: You should consult your attorney and accountant to determine
the liabilities and federal tax and paperwork requirement for each
business format.
If one of your employees causes an
accident, can an injured person sue
you and take your house, car, or
savings account? Are you paying more
taxes than you should on your
business income? These are important
questions that many small business
owners ignore, yet the answers
depend on the business' legal
structure.
Sole Proprietorships
The vast majority of small
businesses start out as sole proprietorships. These firms are owned by one
person, usually the individual who has day-to-day responsibilities for running
the business. Sole proprietors own all the assets of the business and the
profits generated by it. They also assume complete responsibility for any of its
liabilities or debts. In the eyes of the law and the public, you are one in the
same with the business.
Partnerships
In a Partnership, two or more
people share ownership of a single business. Like proprietorships, the law does
not distinguish between the business and its owners. The partners should have a
legal agreement that sets forth how decisions will be made, profits will be
shared, disputes will be resolved, how future partners will be admitted to the
partnership, how partners can be bought out, and what steps will be taken to
dissolve the partnership when needed. Yes, it's hard to think about a breakup
when the business is just getting started, but many partnerships split up at
crisis times, and unless there is a defined process, there will be even greater
problems. They also must decide up-front how much time and capital each will
contribute, etc.
Corporations
A corporation chartered by the
state in which it is headquartered is considered by law to be a unique entity,
separate and apart from those who own it. A corporation can be taxed, it can be
sued, and it can enter into contractual agreements. The owners of a corporation
are its shareholders. The shareholders elect a board of directors to oversee the
major policies and decisions. The corporation has a life of its own and does not
dissolve when ownership changes.
Subchapter S Corporations
A tax election only; this election
enables the shareholder to treat the earnings and profits as distributions and
have them pass through directly to their personal tax return. The catch here is
that the shareholder, if working for the company, and if there is a profit, must
pay him/herself wages, and must meet standards of "reasonable compensation".
This can vary by geographical region as well as occupation, but the basic rule
is to pay yourself what you would have to pay someone to do your job, as long as
there is enough profit. If you do not do this, the IRS can reclassify all of the
earnings and profit as wages, and you will be liable for all of the payroll
taxes on the total amount.
Limited Liability Company
(LLC)
The LLC is a relatively new type of
hybrid business structure that is now permissible in most states. It is designed
to provide the limited liability features of a corporation and the tax
efficiencies and operational flexibility of a partnership. Formation is more
complex and formal than that of a general partnership.
The owners are members, and the
duration of the LLC is usually determined when the organization papers are
filed. The time limit can be continued, if desired, by a vote of the members at
the time of expiration. LLCs must not have more than two of the four
characteristics that define corporations: Limited liability to the extent of
assets, continuity of life, centralization of management, and free
transferability of ownership interests.
Write A Business Plan
What goes in a business plan? The
body can be divided into four distinct sections:
1) Description of the business
2) Marketing
3) Finances
4) Management
Agenda should include an executive summary, supporting documents, and financial
projections. Although there is no single formula for developing a business plan,
some elements are common to all business plans. They are summarized in the
following outline:
Elements of a Business Plan
1. Cover sheet
2. Statement of purpose
3. Table of contents
I. The Business
A. Description of business
B. Marketing
C. Competition
D. Operating procedures
E. Personnel
F. Business insurance
II. Financial Data
A. Loan applications
B. Capital equipment and supply list
C. Balance sheet
D. Breakeven analysis
E. Pro-forma income projections (profit & loss statements)
F. Three-year summary
G. Detail by month, first year
H. Detail by quarters, second and third years
I. Assumptions upon which projections were based
J. Pro-forma cash flow
III. Supporting Documents
A. Tax returns of principals for last three years Personal
financial
statement (all banks have these forms)
B. For franchised businesses, a copy of franchise contract and
all
supporting documents provided by the franchisor
C. Copy of proposed lease or purchase agreement for building
space
D. Copy of licenses and other legal documents
E. Copy of resumes of all principals
F. Copies of letters of intent from suppliers, etc.
Sample Plans
One of the best ways to learn about
writing a business plan is to study the plans of established businesses in your
industry.
