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DQ News: Is Your Business Set Up To Flourish… Or Fail?

Great looking business cards? Well, maybe you shouldn’t hand them out just yet.

While conducting business seminars during my career at the Internal Revenue Service, I discovered that many new business owners had excellent products or services to offer potential customers, however, they needed professional help when it came to business planning and selecting an appropriate business structure.

The Importance of the Plan

To increase the possibilities of success, a strong business foundation should exist before operations begin.

Remember this: business success only occurs when preparation meets opportunity.

A business plan guides the business owner through the steps that are necessary to start the business and keep it on track.

The plan must include:

• Description of the business – What is being sold?
• Market analysis – Will people buy the product or service?
• Management – Are the business managers qualified?
• Operations – How will the work get done?
• Financial – What are capital, income and expenses projections?

The business plan will assist a new business in accomplishing the major tasks of financing the business, producing the product or service, and marketing the product or service. Of course, there are other critical business tasks, such as finding suppliers, hiring employees and developing an accounting system.

Pick the Proper Structure

As for the law, there are a number of legal structures that can be selected for a business. The most common are sole proprietorships, general and limited partnerships, C corporations, S corporations, and the Limited Liability Company (LLC).

Which is best? Well, that depends…

Each legal structure consists of organizational options that are appropriate for different business situations and which affect income tax and legal liability issues.

For someone working alone, a Sole Proprietorship is a business owned by individual person. It is the simplest legal structure. The individual person, the proprietor, has the right to all of the profits generated by the business (that’s the good news!), but is also responsible for taxes on income, business debt, and legal liability.

If multiple persons are involved – and hopefully work well together – a Partnership could be formed. This is a business owned by two or more individuals who enter into a formal agreement to contribute their funds and other resources to business and to share profits. Each partner pays income taxes personally. General partners make management decisions, actively participate in the business, and are personally liable for the financial obligations of the business. The liability of limited partners however, is limited and to the amount of their investment.

In a C corporation, shareholders (owners) transfer money, property, or both, for the corporation capital stock. A corporation is a legal structure in which the owners are not personally liable for the financial obligations of the business. They can lose only the money they invest. A corporation takes the same tax deductions as a sole proprietorship to determine taxable income.  Special deductions are also allowed

The profit of a corporation is taxed to the corporation when earned and then is taxed to the shareholder when distributed as dividends. This is known as “double taxation” (ouch!)

An S corporation is exempt from federal income tax except for taxes paid on certain capital gains and passive income. Shareholders include on their personal tax returns their share of the corporation income, deduction, loss, and credit.

Finally, a limited liability company (LLC), is a very popular form of business organization. It provides some of the benefits of partnerships and corporations. As in a partnership, the company does not pay income tax. Each member pays income taxes personally. LLC members have the same limited liability as corporate shareholders and are not personally responsible for the debts of the company.

Well, since every business needs to have a foundation from which it can “flourish”, there may be a few things for you to think about before you start passing out those business cards…

About the Author: Lyndon Ford, Enrolled Agent, MBA is a former IRS Agent and host of the “Tax Trouble Help Show” which is broadcast on News/Talk 1400AM WDTK Detroit or internet streaming on WDTKAM.COM. The show can be heard “live” on Saturdays at 7:30AM EST and on replay, Sundays at 5:30PM EST.  Podcasts of the show and information about and nationwide IRS tax trouble representation services we offer can be found at www.taxtroublehelp.com or call 877.249.1383.  IRS audits, collections (liens, levies), and unfiled tax returns.  In Tax Trouble? Don’t Worry…We Can Help!

Photo Credit: hans.gerwitz

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