Navigating the Complexities of Business Legal Structures
Posted at 1:42 PM - Sunday, April 27, 2008 by Joseph - 0 comments
If I'm going to start a business, I need to go all the way. I need to actually create a legal business, not just run a lemonade stand on the sidewalk. The types of businesses I have to choose from are sole proprietorship, partnership, limited liability company, C corporation, and S corporation. Most of these types of business structures aren't what I'm looking for so I'll just cover them briefly.
The main things to think about when picking out your legal structure are initial fees, personal liability, ability to raise capitol, simplicity to set up, and taxation. Each of these things will be important factors and can change the profitability of your business significantly.
Sole Proprietorship: This is the simplest of the business structures. All that needs to be done is register a fake name form with your local county and publish the new name in a newspaper ad for 3 weeks. Taxation is also quite simple. All business profits simply count as income for the owner. This is just entered on a standard 1040 tax form. Nothing complicated. The draw back is that the business is not a separate legal entity from the owner. They are one. If the business has a debt, the owner has a debt. If the business gets sued, the owner can lose more than just the business. The owner could lose everything just the same as if he were personally sued.
Partnership: This is the same as a sole proprietorship except that two business partners own the business. An important note about partnerships is that either partner can enter into business contracts that both partners are liable for. Think long and hard about who your partner is before entering into this relationship.
Limited Liability Company (LLC): The limited liability company is the new kid on the block, but becoming quite popular. It offers the ease of taxation (if so desired) of a sole proprietorship with the protection of being a separate legal entity. If your business were to be sued, you could only lose as much as you had put into the business. You will have to treat the business as a seperate entity though. It must have its own bank accounts and you must keep very careful records. Owners are known as members. An LLC can be either member managed or manager managed.
C Corporation: A C corporation is your old school, tried and true form of business structure. Owners are known as shareholders and there can be as many shareholders as you desire. Setting up a corporation is quite tricky so you will probably need the help of a lawyer. The biggest down side to a C corporation is that profits are taxed twice. They are taxed once when the corporation itself gets them and then again when the profits are passed on to the shareholders. There is a lot of paperwork to go with a corporation. Quarterly reports will need to be made and minutes for all meetings with directors and the board will need to be kept.
S Corporation: A S corporation is a twist on the C corporation. There is no double taxation. The profits just get taxed once when they are filtered to the shareholders tax returns. The catch is that there can only be up to 75 shareholders. Everything else is just like a C corporation.
With all of this figured out, the question is "What should I pick?" When looking at complexity and the fact that for the time being I will be the sole owner, the choice gets narrowed down to sole proprietorship and LLC. To initially set of a sole proprietorship in IL it costs $5 to file a certificate of ownership of business and then around $100 to print the name for three weeks in a newspaper of general circulation. It will cost $500 to set up an LLC. While the legal protection a LLC would provide me would be nice, I will be running a web based software service. There will be no products shipped to anyone. I'm considering making the software ad supported so the users won't even be paying to use the software. This makes it highly unlikely that I would need the legal protection of a LLC. My plan is to start as a sole proprietorship because the cost is lower and the paperwork is simpler. I'm trying to start this business with very, very little money so saving $400 is a huge deal to me. If the business starts becoming profitable, I will use the earnings from the business to convert to an LLC. In the beginning of my company, I will need to spend most of my time creating a good software product, not on legal paperwork. As my business grows, I can spend more time on legal matters.
Partnership: This is the same as a sole proprietorship except that two business partners own the business. An important note about partnerships is that either partner can enter into business contracts that both partners are liable for. Think long and hard about who your partner is before entering into this relationship.
Limited Liability Company (LLC): The limited liability company is the new kid on the block, but becoming quite popular. It offers the ease of taxation (if so desired) of a sole proprietorship with the protection of being a separate legal entity. If your business were to be sued, you could only lose as much as you had put into the business. You will have to treat the business as a seperate entity though. It must have its own bank accounts and you must keep very careful records. Owners are known as members. An LLC can be either member managed or manager managed.
C Corporation: A C corporation is your old school, tried and true form of business structure. Owners are known as shareholders and there can be as many shareholders as you desire. Setting up a corporation is quite tricky so you will probably need the help of a lawyer. The biggest down side to a C corporation is that profits are taxed twice. They are taxed once when the corporation itself gets them and then again when the profits are passed on to the shareholders. There is a lot of paperwork to go with a corporation. Quarterly reports will need to be made and minutes for all meetings with directors and the board will need to be kept.
S Corporation: A S corporation is a twist on the C corporation. There is no double taxation. The profits just get taxed once when they are filtered to the shareholders tax returns. The catch is that there can only be up to 75 shareholders. Everything else is just like a C corporation.
With all of this figured out, the question is "What should I pick?" When looking at complexity and the fact that for the time being I will be the sole owner, the choice gets narrowed down to sole proprietorship and LLC. To initially set of a sole proprietorship in IL it costs $5 to file a certificate of ownership of business and then around $100 to print the name for three weeks in a newspaper of general circulation. It will cost $500 to set up an LLC. While the legal protection a LLC would provide me would be nice, I will be running a web based software service. There will be no products shipped to anyone. I'm considering making the software ad supported so the users won't even be paying to use the software. This makes it highly unlikely that I would need the legal protection of a LLC. My plan is to start as a sole proprietorship because the cost is lower and the paperwork is simpler. I'm trying to start this business with very, very little money so saving $400 is a huge deal to me. If the business starts becoming profitable, I will use the earnings from the business to convert to an LLC. In the beginning of my company, I will need to spend most of my time creating a good software product, not on legal paperwork. As my business grows, I can spend more time on legal matters.
Book Review - The Small Business Bible
Posted at 4:36 PM - Monday, April 21, 2008 by Joseph - 1 comments
The Small Business Bible by Steven D. Strauss is absolutely fabulous! Every new entrepreneur should stop whatever they are doing and read this book right now. This book is a great overview of every aspect of business for all forms of business. It doesn't matter if your going to work from home or start a franchise. It doesn't matter if you have $100 to start your business or $10,000,000, you need to read this book.One of the things I liked about the book is it will help you figure out what kind of an entrepreneur you are (or if you are one at all). It gives realistic looks at the different kinds of risks that an entrepreneur would take and helps you find out if you can handle that much risk.
This is the perfect book to read if you no nothing about starting a business. It is a wonderful overview of the entire business cycle. There is a great section on writing a business plan and there is a full sample business plan in the appendix. Strauss lists out the common expenses so you can be realistic about what it will take to get your business going for the first six months.
Strauss is a lawyer who has some really good legal insights. He not only describes all the different business forms, he gives advice on which ones would probably be the best for you. He talks about the various up front costs, tax benefits, and legal protections each kind of business structure offers. It's in nice and friendly English, no legalese anywhere.
You may not need/want to read the entire book because there are different sections for different types of businesses. If you are going to work at home you would want to read that section, but could skip it otherwise. The same goes for the franchise sections. There is some good advice for how to start a franchise and what to look for in a franchise. There is even a couple running the business on a shoestring sections which is great for me!
My one complaint about the book is that it wasn't always as detailed as I would like. This this is easily forgiving because of its breadth of knowledge. It's good to think of this book somewhat like a business encyclopedia. It will have a little but on everything but details on nothing.
All in all, everyone who is thinking about starting a business should read this book. It won't answer every question, but it will get the ball rolling. This will help you figure out where to start and what to do next.
Learning the Ropes for Free
Posted at 12:48 PM - Saturday, April 19, 2008 by Joseph - 0 comments
So I want to start a business, but don't know anything about business. I also have don't have the funds or the time (got to keep working to support the family) to go back to school to learn about business. What am I to do?Luckily for me, college taught me a really useful skill - research! Ah research, the favorite geek pastime. Library card in hand I headed off to the public library to get a stack of books to start learning what I will need to know to be successful. I realize that there is no way I can learn everything from books, much of my learning will have to be through experience, but I will be able to learn a lot from advice of others.
Here is what's in the book pile so far:
The small business bible : everything you need to know to succeed in your small business by Steven D. Strauss
Common sense business : starting, operating, and growing your small business--in any economy by Steve Gottry
How to make big money in your own small business : unexpected rules every small business owner needs to know by Jeffrey J. Fox
The small business start-up guide by Robert Sullivan Legal guide for starting & running a small business by Fred S. Steingold
Building your business with Google for dummies by Brad Hill
How to write a great business plan for your small business in 60 minutes or less by Sharon Fullen
Under the radar : starting your net business without venture capital by Arnold Kling
What the best MBAs know : how to apply the greatest ideas taught in the best business schools edited by Peter Navarro
Getting things done : the art of stress-free productivity by David Allen
As I read these I will post lessons I learned and other tidbits of useful information. I didn't have a list of books I wanted when I went to the library. I just searched around the library for a while and hopefully picked out useful books. They may be great or they may be duds. I'll find out soon!
Hello, World!
Posted at 5:23 PM - Tuesday, April 15, 2008 by Joseph - 0 comments
I am a first time entrepreneur looking to start an online software development company. My background is entirely in software development, not business. That's why this whole idea is scary. I have a lot to learn. The point of this blog is to help organize my thoughts and share my experience with the world.I'm trying to start my business on the cheap. I still need to support my family, so I won't be able to just put all my savings into my business. Since I will be keeping my full time job, I won't need to be earning profits from my company right away. Any profit can be invested back into the company itself.
Maybe my journey will inspire someone else or just show the world a way not to start a business. I have no idea. If anyone has any advice for me along the way, I would love to hear it.