Session 5: Business organization

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Session 5: Business organization

It is best to make your decision concerning whether to have a partner by preparing a "for" and "against" list. The most common reasons for joining with another person to start the business:

There is safety in numbers. In other words, you have two heads instead of one to discuss and make decisions. In the words of Solomon: "Two can accomplish more than twice as much as one. If one fails, the other pulls him up; but if a man falls when he is alone, he's in trouble. And one standing alone can be attacked and defeated, but two can stand back-to-back and conquer. Three is even better, for a triple-braided cord is not easily broken."
You will not need to be at the business at all times. You will have someone else who will be there to share the load and permit you to take a vacation and have sick time.
You will also have a highly motivated co-worker, not just someone who is earning a paycheck.
Partners can also be advantageous when they have complementary skills.
It may be necessary to have a partner to contribute capital and share the risk when things do not proceed as planned.
Some of the arguments against having a partner:

You will have to share the rewards if the business is successful.
You will lose total control over the business, particularly if you and your partner have difficulty in making decisions.
You will have to share the recognition that will come if the business is successful.
A partner can be a disaster if his or her judgment is not good.
You run the risk of a falling out and perhaps the necessity of one partner buying the other out if dissention arises.
Some of the things to consider in deciding whether a particular person will make a good partner are whether you have similar work habits, similar objectives concerning how to run the business and whether your strong points are similar or complementary. For example, different capabilities permit you to spread the workload and provide better coverage for problems.

Different capabilities may permit you to give each partner a veto over important decisions in his or her area of expertise to help maintain stability and eliminate conflicts. Finally, you may want to consider whether you should have a buy-sell agreement in the event of a disagreement, and how the purchaser will pay for the portion of the business he or she is buying (and whether you should fund the buy-sell agreement with insurance in the event of the death of a partner).


What Type of Business Organization is Best for You?
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Whether you are going it alone or with another person, it is best to consult a lawyer to determine which form of business organization will be best for you. Your choices and the benefits of each form are essentially as follows:
Sole Proprietorship: A sole proprietorship is one person alone. He or she will have unlimited liability for all debts of the business, and the income or loss from the business will be reported on his or her personal income tax return along with all other income and expense he or she normally reports (although it will be on a separate schedule). Although proprietorship avoids the expense of forming a partnership or corporation, many start businesses this way because they are unfamiliar with the other forms of organizations.
General Partnership: In a general partnership, each of the two or more partners will have unlimited liability for the debts of the business. The income and expense is reported on a separate return for tax purposes, but each partner then reports his or her pro-rata share of the profit or loss from the business as one line on his personal tax return.
Limited Partnership: With a limited partnership, each of the general partners has unlimited liability for the debts of the partnership, but the limited partner's exposure to the debts of the partnership is limited to the contribution each has made to the partnership. With certain minor exceptions, the reporting for tax purposes is the same as for a general partnership.
Corporation: A corporation provides limited liability for the investors. Except as indicated below, none of the shareholders in a corporation is obligated for the debts of the corporation; creditors can look only to the corporation's assets for payment. The corporation files its own tax return and pays taxes on its income. If the corporation distributes some of its earnings in the form of dividends, it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation has paid taxes on its earnings. A corporation has some tax benefits such as deductibility of health insurance premiums.
Robert O'Dell
E-Information Strategies

What kind of structure is right for a home based business?
"S" Corporation: A corporation that has made an election to be an "S" Corporation for federal income tax purposes is treated as a partnership for tax purposes, although it is treated as a regular corporation for other purposes.
Limited Liability: A limited liability company provides limited liability for all of its members, but typically can be treated as a partnership for federal income tax purposes. State laws may differ as to whether it is treated as a partnership or a corporation for state income tax purposes. It can be managed by all of the members or can have centralized management in one or more of the members. For details on all options available for federal income tax purposes


Obviously there are variations in these rules, and you should consult with your attorney and/or accountant in each specific case to determine what form of organization best fits your needs.

One of the things to consider in making the final decision is, although a corporation has limited liability for its shareholders, if the corporation does not have sufficient assets various creditors may insist on personal guarantees from the shareholders. Examples are your landlord, some suppliers, and by law, liability for certain payroll taxes and liabilities to employees.



What are some of the most common mistakes you see with people going into small business?
There are many laws that are applicable to owners of small businesses. It is best to consult with professionals to determine which laws will be applicable to you, what permits you will need to commence business and where to go to comply with the various rules. Your attorney should be able to assist you in complying with labor laws such as the employment of minors, illegal aliens and workplace safety rules. Your accountant should be able to assist you in filing:
Income tax returns
Franchise tax returns
Employment tax returns
The time for payment of withheld and employers share of employment taxes
Unemployment tax returns and payment

How Can Your Professionals Help You?
Your Attorney
In addition to the above items, your attorney should draw your partnership agreement or form your corporation, including the issuance of stock and appropriate filings with the Secretary of State and the Department of Corporations. He or she will help advise on the best form of ownership, assist in negotiations to buy an existing business and review documents if you are buying a franchise. He or she will also advise on buy-sell agreements and draft appropriate documents.

If your business will require renting an office, store or factory, your attorney should review and approve your lease document. A lease obligation can become your biggest liability, and your attorney can help negotiate fair and protective terms. For example, if you anticipate growth, your lease should include a provision for how expansion requirements will be handled.

Your new business may require specialized legal advice to establish and protect your intellectual property rights. Intellectual property includes your ownership rights to your business name, trademarks, copyrights and patents. Intellectual property law is a specialized field, and you may need an attorney who specializes in these matters.

Your Accountant
Your accountant can be an important advisor in start-up decisions, such as

Deciding the appropriate division of the capital you contribute to a corporation between stock and loans.
Determining the best form of ownership.
Helping set up the books and records of the business.
Advising computer needs for accounting purposes.
Filing tax returns, advising on compensation of owners, preparing financial statements, helping forecast cash needs, including whether to expand, addition of employees and determining profitability.
He or she will have a continuing role in filing tax returns, advising on compensation of owners, preparing financial statements, helping forecast cash needs, including whether to expand, addition of employees, and whether you are really making money in this venture.

Your Payroll Service Provider
All entrepreneurs face the dreaded question, "How am I ever going to handle my payroll, payroll taxes and comply with ever-changing state and federal laws?"
Thanks to efficiencies achieved through computer technologies, a huge industry has emerged to take over increasingly complex payroll issues. "Payroll Service Providers" now permit small businesses to outsource these functions at very low costs. Now the start-up entrepreneur, even with a payroll of one person, can "outsource" his or her Human Resources department.

There are many payroll service providers listed in the Yellow Pages and on the Internet (go to "payroll service providers" on search engines.) In recent years, payroll service providers have expanded their services to handle other personnel issues as well, such as managing retirement plans, workers compensation insurance and pre-employment verification. Many payroll service providers incorporate services such as


THE TOP TEN DO'S
Use a "For" and "Against" list when deciding if and whom you should have as a partner.
If considering a partner, look for someone with complementary skills to your own.
If you take on a partner, have a buy-sell agreement in place before you start.
Consult with a lawyer when deciding on what form of business best suits your needs.
Use an intellectual property lawyer to protect your intellectual property rights: your trade name, company name, logo, etc.
Outsource your payroll responsibilities to a payroll service provider.
Establish a tax deferred pension plan for yourself and your employees.
Collect referrals about lawyers, accountants and insurance agents before retaining them.
Use your attorney to assist you in maintaining compliance with changing labor laws.
Join a local service organization such as the local chamber of commerce.