Article Vault A - Z (Business Entities)


Sole Proprietorship

When starting a business from home, you'll find that becoming the sole proprietor is the easiest choice to make.

This means that you are 100% responsible for every part of the business, including the administrative decisions and the debts that you may owe. It has many benefits apart from the sheer control it gives you over the business. You aren't accountable to anyone other than yourself.

And you don't have to seek out legal services or file a lot of paperwork like you do when you incorporate. Although many small businesses feel like they must incorporate to be an "official" business, they don't realize the additional complications that it creates. Business owners who do taxes as a sole proprietor tend to have a much easier time than those who must file forms for a corporation.

But becoming a sole proprietor has downsides as well.

Downsides To Becoming a Sole Proprietor

If you decide to become the sole proprietor of a home based business, you will put your own livelihood at risk. The money you borrow to start up the business will come from your personal credit, and therefore you will be responsible for paying it back. If the business should fail, this would mean liquidating all of your assets to pay back the lenders that helped you get on your feet. Therefore it may be harder to start larger or riskier businesses with a sole proprietorship. You can only have smaller business plans, but this may have been what you were planning anyway.

Alternative To Becoming A Sole Proprietor

You may also consider another business form such as a partnership. If you have a friend or colleague who would like to go into business with you, this could be a better choice. With sole proprietorship, you have complete control over the company. But for many people, this isn't a positive. With a partnership, you are able to discuss business decisions and get the opinion of another person. If you can provide each other with feedback, your business will take off much faster and will have a higher chance of success.

But there are downsides to being in a partnership as well. For example in a partnership you are liable for your partner's actions. So if your partner does something illegal or has some negative spending habits, you will pay the price too. You have to make sure you really trust the person you enter into a partnership with.

And you have to make sure you and your partner work well together. Since you and your partner both own 50% of the business, no one is in control. If you have a disagreement with your partner, you may find it hard to move the business forward. Of if your partner decides to leave the business and wants to cash out, it can kill the company. Likely you'll have to liquidate your business assets to pay your partner off.

Eventually, your choice will depend on how confident you are that you can control the business effectively on your own. The thought of having complete control over a business overwhelms many people, while many jump at the chance. So if your personality allows for it, a sole proprietorship will be a good choice because of the tax savings and the money you will save.

If you are just getting your business off the ground, one of the more key issues will be your choice of a legal structure. If you aren't going to incorporate your business, you can choose between a sole proprietorship or a partnership. Which one is right for you will depend on your financial situation and how much freedom you want to have.

1. Sole Proprietorship

There are many advantages to owning your own proprietorship. Here are just a few:

- Takes only one person to run
- Simplest and least expensive business to form
- Few legal restrictions
- All profits (and losses) go to you
- Controlling decisions made by you

However, there are also many disadvantages to owning your own proprietorship. Listed below are some of the more common ones:

- Unlimited liability (may exceed your investment)
- Heavy responsibility
- Your knowledge alone drives the company forward
- Limited growth potential

2. Partnerships

Another legal basis for starting a business is the partnership. Keep in mind that partnerships can be between more than two people. Often partners have different skills, or one parner is financially supporting the business while the others do all the work.

Advantages

- Quick and easy to form
- Shared responsibility
- Capital can be raised faster

Disadvantages

- Again, unlimited liability
- If the business goes down the tubes, so might your friendship
- More complicated about what to do when one or more partners wants to stop being a part of the business

3. Breaking Up Is Hard To Do

When a partnership ends, it can often be a source of great dispute between the partners. It is highly recommended that you use a shotgun clause. A shotgun clause is where, in the event that one of the two partners decides he wants to get out of the agreement, he can allow the other partner to offer an amount of money to buy out his half of the company. The clause then goes on to state that the partner can then fire right back at the other partner and buy out their half for the same amount. In other words, imagine two kids fighting over a pie. You tell the kids that either one of them can cut the pie into two pieces, but then the other kid gets to choose what piece he wants first. This ensures that if your business partner offers you a dollar for your half of the business, you can fire right back at him and buy his half out for a dollar. This ensures you get a reasonably fair price for your half of the business.


Partnership Agreement

A partnership agreement is a relationship between individuals or organizations. Parties involved should be in close cooperation and share responsibilities. A partnership agreement isn't necessarily a legal contractual relationship but a relationship where you come in union to accomplish common goals and purposes that will benefit both parties. A partnership agreement is basically one where you both try striving to meet success.

These partnerships could include federal/state/local government, educational institutions, trade associations, or other organizations. A partnership is defined as a "working relationship" which means mutual participation and joint interest.

Partnership agreements are a good way to achieve goals that would otherwise be to far out of your reach. When people and/or organizations come together you can share responsibility and therefore focus harder on things you feel need the most attention. Partnerships can be effective ways to re-stabilize unorganized businesses, expand, go global, go national, increase customer base, increase sales through referrals, provide even more services your customers may desire, and much more.

Often times partnerships are used when resources are limited, partnerships are a way of maximizing your resources to achieve goals and strengthen existing relationships through consumer protection, etc.

Also, companies in need of skilled, talented workers will often times partner with a company/organization that has the talented, skilled, experienced employees you need to train workers and keep your business on the right track.

The requirements to file and sign a partnership agreement form usually are:
- You both must be at least 18 years old.
- Both partners must be present when filing the partnership agreement
- A legal picture I.D. card is required from each partner.
- If you had a previous partnership you must file a notice for ending the partnership with the County Clerk or Notary Public before you can file a new partnership agreement.
- Usually there's a filing fee $10-$50 often times and they usually accept all forms of payment.


Understanding Corporations And Limited Liability Companies

Corporations and Limited Liability Companies (LLC) are formed to shield owners from personal liability for the debts and obligations of their businesses. One of the major differences between a corporation and an LLC is that they have different federal tax liabilities.

Corporations are incorporated according to the state laws and the owners are shareholders, who have stock certificates issued by the corporation. The owners elect a Board of Directors to manage and guide the company and the owners appoint officers to execute and run the day-to-day operations. Members of the company form a Limited Liability Company, which they manage through one or more managers. Both entities, the corporation and the LLC, must pay franchise taxes.

Basic Differences Between The Corporations And The LLC
The basic differences between and the corporations and the LLC are listed below.

1. A corporation pays taxes according to the laws of the particular state applicable to corporations. An LLC with more than one member is classified as a partnership by default. These partners may select being taxed as a C-Corporation or an S-Corporation.

2. In a corporation, the owners are called 'shareholders,' whereas the owners of an LLC are called 'members.' S Corporations can have only 100 shareholders, but an LLC may have unlimited members. Corporations like the S corporations are not permitted to have non-US citizens as owners. This rule does not apply to LLC.

3. A corporation must adhere to certain formalities such as meetings for the Board of Directors, annual shareholders meetings. An LLC doesn't need to engage in these formalities. S corporations can't be owned by an LLC, trusts, or other corporations, but there are no such restrictions on an LLC.

4. Shareholders of a corporation can transfer their shares to another person easily. In the case of an LLC, the members must obtain permission from other members before they can do so.

5. Corporate laws allow shareholders and officers to be individually sued if the corporate formalities are not followed. The LLC laws specifically bar lawsuits against members for the liabilities of the LLC.

6. An LLC is not required to maintain records and documents, but this is mandatory for corporations. If the proper formalities are not followed in the case of a corporation, the owners are liable for the company's obligations.

7. The existence of an LLC is limited to 30 years, whereas a corporation's life is perpetual

8. An LLC offers liability protection like corporations and tax benefits provided by a partnership. However an LLC may face an uncertain future and possibly dissolution if a member dies without leaving instructions to replace, continue, or terminate an LLC.

Taxation
The major difference between a corporation and an LLC is taxation. C corporations are taxed as separate entities, which pay their own tax, but LLCs are taxed as part of the members' assets. This means C corporation owners can't deduct business loses from individual tax returns, but LLC members can.

Additional Help
These are a few of the differences between a corporation and a Limited Liability Company. It is advisable to form either one or the other according to the needs of your business to minimize the risk of losing personal assets due to unpaid business credits. Several firms offer excellent software and services related to corporations and Limited Liability Companies, which enable them to run smoothly.


How To Get An LLC Tax Deduction

We all love to operate under limited liability and all the more better if we could get some relief from the tax guys.

Well, there is no immediate respite from the tax chaps, so don't try running from those guys.

They have three options.
-They can file returns either as a corporation, a partnership or sole proprietorship. Certain llc'sare put under the same category and taxed alike.

These LLCs are the ones that have been formed under a State or Federal statute or under the statute of a federally recognized Indian tribe wherein they have been described either as a corporation, body corporate or body politic or a joint stock association. The same is true of businesses owned by state, foreign governments or entities described in section 1.892.2-T. Any Association formed under Regulations section 301.7701-3 is also seen as a corporation by the federal government as are insurance companies.

Form 8832 has to be filled if it is not a corporation and elect to conduct business either as a corporation or a partnership. at least 2 persons have to be present to constitute a partnership or a corporation. Similarly, a business entity with a single member can choose to be classified either as an association taxable as a corporation.

the default rules come into play If an LLC does not File Form 8832. if a corporation has only two members, it has to file taxes as a partnership and an LLc likewise has to file an application for sole proprietary fit has only one member.

so, it is better to take help from those friendly tax consultants and get to know the rules better and this helps us a lot.