When considering starting a new business, many people instinctively seek the advice of a lawyer as the first step in the process. However, legal advice is not what we need in the beginning. Instead, regardless of the size of your business, it`s much more important to seek the advice of an experienced tax professional, such as a CPA, first. This is because each form of business ownership is treated differently by the IRS and national and local tax authorities. Depending on the legal structure of the business, the owner may be taxed at a lower rate than someone who works for a large corporation, or the owner may have their business income taxed twice, sometimes with additional special taxes levied by government agencies. The time for an entrepreneur to decide the burden of the tax burden, which he is willing to bear, is at the beginning of the business, not April 15, when taxes are due. Meanwhile, Jerry Greenfield (Ben & Jerry`s “Jerry”) followed a similar path. He studied pre-medicine at Oberlin College in hopes of becoming a doctor one day. But he had to abandon that goal when he wasn`t accepted into medical school. On a positive note, however, his college education steered him into a more lucrative field: the world of ice cream making.
He got his first glimpse into the ice cream industry when he worked as a shovel in Oberlin`s canteen. Fourteen years after their first meeting on the college track and field team, Ben and Jerry met again and decided to go ice cream. They moved to Burlington, Vermont — a college town that needed an ice cream shop — and took a $5 correspondence course from Penn State on how to make ice cream. After getting an A in the course – not surprising since the tests were open book – they took the plunge: with their savings of $8,000 and $4,000 in borrowed funds, they opened an ice cream shop at a converted gas station on a busy Burlington street corner.1 The next big decision was which form of business ownership was best for them. This chapter introduces you to their options. Most large companies, such as Canadian Tire, are organized as corporations. A key difference between a corporation, on the one hand, and a sole proprietorship and partnership, on the other, is that corporations involve the separation of ownership and management. Companies sell shares of ownership that are publicly traded and managed by professional executives.
These officers may own a significant portion of the company`s shares, but this is not a legal requirement. A connection between two or more people in profit-seeking businesses. Partnerships can be created with little formality, but since more than one person is involved, a partnership agreement should be established. A partnership agreement establishes the company`s terms by formalizing rules relating to profit and loss sharing, ownership shares, dissolution conditions, and management rights, among other things. Another downside of starting a business — which often discourages small businesses from starting a business — is the fact that starting a business costs more. When you combine filing and licensing fees with accounting and legal fees, starting a business can cost you anywhere from $1,000 to $6,000 or more, depending on the size and scope of your business.4 In addition, businesses are subject to government regulation and oversight that can place a burden on small businesses. Finally, companies are subject to what is known as “double taxation”. Companies are taxed by the federal and state governments on their profits. When these profits are distributed in the form of dividends, shareholders pay taxes on these dividends.
Thus, corporate profits are taxed twice – the company pays taxes the first time and shareholders pay taxes the second time. Here are some important factors to consider when choosing your company`s legal structure. You should also plan to consult your CPA. Kalish points to the high cost of filing and paperwork, as well as the costs associated with start-up, as one of the reasons entrepreneurs may opt for another option, such as a sole proprietorship or partnership. Completing administrative requirements often consumes the owner`s time and thus incurs costs for the business. A form of ownership that is granted when the owners are not personally liable for the debts that the LLC accumulates (as in a corporation) and the LLC can be managed flexibly (as in a partnership). Another advantage of integration is continuity. Since the company has a separate legal life from the lives of its owners, it can (at least theoretically) exist forever. It is the simplest form of business unit. In a sole proprietorship, a person is responsible for all profits and debts of a business.
A limited liability company (LLC) is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership. Under an LLC, members are protected from personal liability for the company`s debts unless it can be proven that they acted illegally, unethically, or irresponsibly in carrying out the corporation`s business. “I`ve heard horror stories from people who, in hindsight, wish they had taken the time and spent the money to get expert advice ahead of time,” Kalish says. This advice can come from a variety of sources, ranging from free/low-cost such as the SBA or Service Corps of Retired Executives (SCORE) to more expensive lawyers and accountants who can serve as valuable sources of information throughout the life of your business. Choosing the right legal form for your business starts with analyzing your company`s goals and considering local, state, and federal laws. By defining your goals, you can choose the legal structure that best fits your company`s culture. As your business grows, you can change your legal structure to meet the new needs of your business. The most common types of businesses include sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here you will find more information about each type of legal structure. Even after deciding on a business structure, remember that circumstances that make a type of business organization favorable are always subject to changes in laws.
It makes sense to re-evaluate your business form from time to time to make sure you`re using the one that offers the most benefits. The legal form under which a company operates is an important decision that has implications for how a company structures its resources and assets. There are different legal forms available for entrepreneur entrepreneurs. Each involves a different approach to the treatment of profits and losses (Figure 9.24 “Forms of business”). If your business is owned and operated by several people, consider structuring your business as a partnership. Partnerships come in two forms: partnerships and limited partnerships. In a partnership, the partners manage the partnership and assume responsibility for the debts and other obligations of the partnership. A limited partnership has both general partners and limited partners. General partners own and operate the corporation and assume responsibility for the corporation, while limited partners act only as investors; They have no control over the corporation and are not subject to the same responsibilities as general partners. Making a profit is a key goal for the vast majority of businesses.
How business owners profit from profits and incur losses varies depending on the legal form. Below we show how profits and losses are treated in different business forms. In addition, each general partner may act on behalf of the partnership, take out loans and make business decisions that affect all partners and are binding (if permitted by the partnership agreement). Keep in mind that partnerships are more expensive to start than sole proprietorships, as they require more extensive legal and accounting services. 2. Tax implications. Depending on the individual situation and the objectives of the entrepreneur, what are the options to minimize taxation? In the following sections, we will look at the possible legal structures that a contractor can choose and consider the advantages and disadvantages of each. We start with the simplest of all forms of organization: the sole proprietorship. One of the first decisions you need to make when starting a business is determining the right legal structure for your business. A unique feature of companies is the way they handle profits and losses. Unlike sole proprietorships and partnerships, business owners (i.e., shareholders) do not receive direct profits or absorb losses.
Instead, profits and losses indirectly affect shareholders in two ways. First, profits and losses tend to be reflected in the rise or fall in the company`s share price. When a shareholder sells his shares, the performance of the company while he owned the shares affects whether he makes a profit compared to the purchase of shares. Shareholders can also benefit from profits if a company`s management decides to pay cash dividends to shareholders. Unfortunately, for shareholders, corporate profits and dividends that support those gains are taxed. This double taxation is a major disadvantage of holding shares in companies.
