It’s always inspiring hearing from a new business owner. They have a unique product or service, a new way of doing things that will not only be a benefit to others, but to themselves to gain independence and provide a livelihood. So now that you have that idea of what you will offer what will you do with it? How will you execute it? The goal of this blog is to start from the ground up: from beginning of launch to the basics. We’re assuming we are speaking to new owners who know nothing of accounting and will cover the basics: debits and credits, accounting systems, payroll, taxes, among others. Once we have laid a foundation we will grow more complex, adding layers and sophistication, while also adding some topical blogs here and there. We hope you learn and come here as a resource!
The beginning is a good place to start
When starting a business, whether it be a product or service one of the first things to decide is how your business will be structured. Will it be just you? Do you have a partner or partners? Will you incorporate? These are important things to think about. There are 4 major types of entities we will go over: Sole proprietor, partnership, limited liability company, and corporation.
A sole proprietorship (also called SP) is the most common type of structure, mainly because it is the easiest to form. The only thing you really need to do here is just open your doors and start doing business! That being said, it is also the riskiest. If you face any legal issues, there is no protection in the event you are sued and if something does arise, you can lose any or all of your personal assets.
A partnership is a form of business structure with two or more people. The most common forms of partnerships and known as general partnerships and limited partnerships. General partnerships are ones in which all partners contribute to the day-to-day operations of a company and can make decisions on the company’s behalf. The partners also share in the profits and liabilities of the company. The partners ownership is considered equal unless otherwise specified.
A limited partnership is one in which there one or more partners that do not make day-to-day decisions in the operations of the business. He/she may have just contributed funds or other resources to the business, and typically their share of liabilities and profits is only to the extent of these contributions. Limited partnerships still require at least one general partner that will oversee the daily functions of the business.
If you decide to form a partnership, it is recommended that you create a partnership agreement. This is a legal document which lists the partners, their individual share of ownership, and other items and details that are associated with the operations and ownership of the business. It is also advisable that if you decide to form a partnership to seek out the counsel of attorney to ensure all partners interests are being protected.
Limited Liability Company (LLC)
A limited liability company is a legal entity set up at the state level. It can be formed by one or multiple people (partnership). An LLC exists so in the case the company is to be sued, the individual owners can only be liable to the extent of their interest in the business. In other words, your personal assets cannot be used to settle either legal liabilities or other liabilities of the business. There are exceptions to this, however. If an LLC is shown to be using business assets for personal reasons of the owners, the owners’ personal assets can then be used to settle liabilities of the business. This is often referred to as “piercing the corporate veil” and is one of the most important reasons to keep business assets and personal assets separate.
A Corporation is a separate legal entity. It also offers greater protection for the owners/shareholders. It is seen as more difficult to pierce the corporate veil of a corporation because of the legal entity. The most common types of corporate structures are C Corporations and S Corporations. C corporations are typically for larger companies with a lot of shareholders. The largest companies around are usually C corporations. They are often not a good fit for small business because they are subject to double taxation: The corporation pays the taxes of the company based on the profits and losses of the businesses, but in addition the individual shareholders are also liable for any dividends they receive from the company.
S Corporations are seen as advantageous because they retain the same corporate protections but with s corporations the individual shareholders pay the taxes of the business, relative to their ownership percentage in the business. In this way it is often said that the taxes “flow” over to the individual owners and aren’t subject to double taxation of C corporations.
Speak to an Attorney
Its recommended that before you decide on any type of entity you speak to an attorney who can walk you through the different entities, the benefits of each and provide guidance catered to your own specific situation. They can also help draft business documents that can protect yourself and other owners of the business. We recommend www.pollardgeneralcounsel.com, which helps new and existing businesses with entity selection, document preparation, contract review, as well as other business services.
Get an EIN Number
After you decide the type of business entity to operate in, the next step is to obtain an Employer Identification Number, also known as an EIN. EIN numbers are issued by the Internal Revenue Service (IRS) to identify businesses and tax returns, much in the same way that social security numbers are used to identify individual taxpayers. Most banks require an EIN to open a business account.
There are certain circumstances which may require you to get a new EIN, such as changing your entity type. To get an EIN, You can apply online with the IRS by going to: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online or download the PDF and mail or fax the IRS form SS-4 https://www.irs.gov/pub/irs-pdf/fss4.pdf.
Get a Business Bank Account
Now that you have an EIN you should be all set to get a business bank account. Its important to separate business income and expenses from your personal account. This ensures accuracy of the accounting data, as well as keeps you in compliance with separation of personal and business for liability purposes. Now you are ready to earn your income and pay for business expenses! We hope your business is as successful as you aspire to and that this resource will help you grow as your business does!