The BizFilings blog covering business tips and trends.
Taking the Long View with Your Small Business
Published on Oct 3, 2011
Read 'Taking the Long View with Your Small Business' at 'Time to Start Up,' the small business blog by BizFilings.
Although taking the long view is a critical element to long-term success, it isn’t always at the forefront of a small business owner’s mind. When it is, the focus is usually on products, services or the competition.But there’s another facet to your small business that needs attention: business formation — often referred to as incorporation. This article is not a detailed synopsis of incorporation types. Instead, today’s focus is on your company’s long-term vision, and how your decisions regarding business formation can affect you — both personally and professionally. Let’s start off at the beginning …
Forming a Sole Proprietorship or General Partnership
If you’re a one man or one woman operation, your company instantly becomes a sole proprietorship as soon as you make revenue. The same is true if you’re a general partnership, which is a company that has more than one owner.The Benefits: In both instances, your company can conduct business, make a profit, deduct expenses and file your business tax return as part of your personal return.The Downside: The greatest pitfall to running a business as a sole proprietorship or general partnership is that you have no limited liability protection.What is Limited Liability Protection?
In a nutshell, limited liability protection shields a business owner against being held personally responsible for their company’s debts and liabilities. With limited liability protection, creditors cannot pursue the personal assets (home, savings, etc.) of the business owner to pay off business debts.As a sole proprietorship or general partnership, owners and their business are legally considered the same — leaving personal assets vulnerable.Since this is obviously not a good thing, what’s a small business owner to do? One option is to form a Limited Liability Company.
What is a Limited Liability Company (LLC)?
As the name implies, when you form an LLC, your company enjoys limited liability protection. This is the most popular business formation choice for small businesses owners because of its ease of operation and the fact that it is relatively inexpensive to form.Other benefits include limited compliance requirements and a flexible management structure, as compared to S corp and C corp formations.Over time, you might find that the next logical step in the progression of your business is to elect S corp status for your LLC. The reason why some LLCs do this is simple:
If your LLC operates an active trade or business, and payroll taxes (SECA taxes) on the owner or owners are high, you may find that an S corporation election is your best choice.Although you might want to leave the taxes to your accountant — who by the way is an excellent resource to discuss formations with — knowing which business formation will grant you the best tax breaks could save you thousands of dollars.No matter which business formation you choose, it’s important to have a crystal clear understanding of each option to make sure it’s the very best choice for you — both today and down the road.Good luck!Related Links:More on Sole ProprietorshipMore on LLCs LLC Elects S Corp Status — The Best of Both Worlds?blog