Financial Facts for Running Your Business
Read Choosing the Right Business StructureBy Eliatt Di Lieto, CPA, CVA
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Taxes ~ A Certainty of Life by Benjamin Pratner
Choosing the Right Business Structure
By Eliatt Di Lieto, CPA, CVA
Many people, when they start up a new business, automatically assume that they should incorporate. But this is not necessarily the right choice for everyone. Currently there are many options that a new business can choose, with no single global formula that can be used to decide which is best. Realistically, each company's facts and circumstances needs to be individually evaluated to determine the most appropriate structure.
So what options are available and which is best for you?
As a new business you can be:
A regular corporation
A subchapter S corporation (also known as a small business corporation)
A Limited Liability Company (LLC)
A Limited Liability Partnership (LLP)
A Partnership
A sole proprietorship
One of the key factors to consider in choosing your business structure is risk. A sole proprietorship and a partnership are cheaper alternatives; however, they do not limit an individual's risk.
Sole Proprietorship: The sole proprietorship is the easiest type of business to create. There are no formal filings that need to be done in order to become a sole proprietor, although many municipalities require you to file for a DBA (doing business as) in order to use a name other than your own. A sole proprietorship also does not require you to be as structured in your accounting, since you and your company are treated as one in the same. It is this very concept, however, that opens you to unlimited exposure. A creditor of a sole proprietorship has the rights to attach any of the owner's personal assets (i.e. home, investments, etc.). This, however, may not be as big of an issue as it sounds. If you are the only one working in the business, you are still liable for your own actions and therefore subject to suit on the personal level regardless, of the type of entity. From a tax perspective, sole proprietorship income is reflected on Schedule C of an individual's form 1040. No separate return is filed. Sole proprietorship income is subject to both income tax, and self employment tax (social security and Medicare).
Partnership: A partnership is just like a sole proprietorship, except it has multiple owners. A partnership has unlimited liability and is taxed the same way as a sole proprietorship. Unlike a sole proprietorship, however, a partnership has to file an additional tax return. A major drawback of a partnership is that each partner is responsible for the actions of his or her partner(s). For example, if your partner contracts to sell 1,000 widgets at a loss of $100 per widget, you can be personally sued for 100% of the loss if the business doesn't have sufficient assets to cover.
Limited Liability Partnership: An LLP provides all the same features as a partnership, with the added benefit of limited liability. An LLP is more expensive to establish, and carries a minimum annual fee which a partnership does not.
Limited Liability Company: An LLC can be taxed either as a partnership or a corporation, based upon an initial election made by its members. The LLC, like the LLP, offers limited liability and minimum annual fees. An LLC, however, can have only 1 member while an LLP cannot. The set-up costs are the same as an LLP, but a single member LLC need not file a separate return, as it is taxed like a sole proprietorship. An LLC provides easier transferability between the entity and its members then a corporation does. As a result, it is often utilized to hold real property.
Regular Corporation: A corporation provides limited liability to its shareholders. Like an LLP or LLC a corporation has a minimum tax, but to the extent a corporation has income a regular corporation is taxed at the corporate level. Unfortunately when distributions of profits are made to shareholders in the form of dividends, they are also taxed at the shareholder level. This double taxation is one of the largest criticisms of corporations. The other major detriment is the transferability of assets between the corporation and its shareholders. This is the most common entity used for publicly traded entities, or entities seeking venture capital.
Subchapter S- Corporation: All companies that incorporate start out as a regular corporation. You must elect to be treated as an s-corporation. The S-corporation eliminates the double taxation that a corporation possesses. All income that an S-corporation earns is taxable in full at the individual shareholder level. This makes the S-corporation very attractive for small, closely held, businesses. Like a regular corporation, an S-corporation is a separate legal entity. As such, it must file an annual tax return.
Other factors can play a role in the decision making process such as where you do business. For instance, New York City has an unincorporated business tax which sole proprietorships, partnerships, LLCs, and LLPs are subject to. In addition, New York City does not recognize S-corporations. As such an S-corporation operating within New York City limits will pay City tax at the corporate level and at the personal level.
This in no way represents a complete analysis of the various business entities and the pros and cons of each. It is merely intended to provide a little insight into each. It is important to discuss the issue with a knowledgeable accountant or attorney.
In addition, if you are going into business, it is important to prepare a viable budget, consider cash flows, understand your competition and your customers, and determine your sources of funding. Almost half of all business do not survive the first two years. Improper planning is typically the biggest reason for this. Lastly, if you are going into business with a partner, make sure you create a partnership, shareholder, or member agreement first.
Good Luck!!!!
Eliatt Di Lieto is a Partner with the accounting firm of Cerini & Associates, LLP where he runs the firm's tax and small business department. He can be reached at (631) 582-1600 x 208 or e-mailed at eliattd@ceriniandassociates.com Visit them at www.ceriniandassociates.com
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Taxes ~ A Certainty of Life by Benjamin Pratner
The biggest expense that an individual has is, payment of Taxes,
and not the mortgage or the credit card payment as we are made
to believe. Taxes play a major role in our every day lives. We
pay taxes in different ways as a salaried person a part of your
salary is deducted as tax, as a consumer we pay a different
taxes and so on.
You may remember the first time you leant about taxes as a child
at school, and wondered why people should be taxed on things.
Now you are an adult but still don't understand why you are
taxed so much and how. But the fact remains that the economy is
based on taxes and we will have to continue facing them.
So what different types of taxes are there? Well, there are a
lot of them. Some examples of types of tax are alcohol tax,
cigarette and tobacco tax, corporate tax, estate and trust tax,
fur tax, individual income tax, insurance tax, legal gambling
tax, property tax, mortgage tax, sales tax, energy tax and
withholding tax. Of course there are more but these are a few
examples.
There are federal taxes and there are state taxes, and you have
to pay taxes at different levels. You must have noticed that
when you purchase something from a store you pay more than the
listed price, as it has to be taxed. At places where income tax
is not charged, the sales tax is much higher to compensate for
it. States that levy sales tax sometimes give a refund or
discount at the end of the year when you file your taxes with
the IRS.
Your taxes are regularly deducted from your salary when you work
for a company or business. How much is deducted depends on your
salary and the number of people dependant on you. If you are
self-employed you still pay taxes but you calculate them
differently. Some people try to avoid paying tax by not showing
any income, but that can get you into trouble if you are audited
by the IRS and you may end up facing huge fines and a jail-term.
If you need to clarify your doubts about taxes and why you have
to pay them, surf the net for information. The IRS website
explains many things to you and also replies to your questions
by phone or e-mail. They have a section on frequently asked
questions, which can be very helpful. Where tax is concerned,
don't hesitate to clarify doubts about something that is such an
important and expensive aspect of your life.
Benjamin Pratner is the tax consultant & guide at Facts Tax
Guide, a complete resource on how to calculate and reduce your
taxes. To learn how to legally pay as little tax as possible,
please visit his site now: http://www.factstax.com
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