Is an LLC the right tax structure for my business?

As we highlighted in part one of our series on sole proprietorships, entrepreneurs should consider the specifics of their business today and where they want to take it tomorrow when choosing a tax structure. In addition, the type of business and planned ownership structure should be considered.

What is an LLC?

A limited liability company is a flexible business entity that provides the simplicity of partnership while extending the tax benefits and personal asset protection of corporate structures.Although LLCs are often referred to as limited liability corporations, this is a misnomer. Technically LLCs are not incorporated and should be referred to as a limited liability company. LLC structures are permitted in a majority of United States jurisdictions. In 24 of the 50 states LLCs are not required to organize for profit pursuant to the Model Business Corporation Act of 1950.

Key points of an LLC structure

Asset protection - An LLC provides protection to members by limiting their personal financial liability against company debts. In the event the business cannot pay its debts, personal assets of its members are protected. 

Tort protection - Limited liability usually protects owners and investors against litigation. If a lawsuit is brought it is filed against the “company”, not members thus again protecting personal assets.

Initial investment - Generally, the liability of members is a fixed amount and corresponds with the capital invested. If the business has no profit and has paid no dividends, personal liability would be zero, regardless of outstanding debts or judgments.

Exceptions of personal liability under an LLC structure

If a member makes a personal guarantee of a loan for the LLC, (co-signing) they may be liable for the debt.

If the LLC fails to acquire insurance or has minimal capitalization, members could be liable.

If personal funds are co-mingled with LLC funds, such as using one bank account for both personal and business expenditures.

If the LLC violates any state laws or fails to pay state taxes, members could be personally liable for debts.

The pros of an LLC structure

Access to capital - An LLC can sell membership interests and create different tiers of membership with different investment requirements, voting privileges or profit characteristics. Venture capitalists are more willing to invest in LLCs vs. a sole proprietorship or general partnership because they are only risking the initial capital investment and have protection against seizure of their personal assets.

Ownership and interests transfers - An LLC can be transferred or sold in whole or in part with out interruption of business continuity. Bank accounts, licenses, permits, tax identification numbers and various assets can be transferred to the new ownership or interests.

With a sole proprietorship or general partnership each asset must be transferred separately and new accounts, licenses, permits and tax IDs must be acquired. 

Cons of an LLC structure

Set up costs - LLC’s allow a less formal structure than corporations but require more organization than sole proprietorships or partnerships. LLC’s have greater set up costs and fees, filing fees and annual state fees. However, LLC’s enjoy lower insurance rates than other structures, which help mitigate annual fees. 

Record Keeping - In addition to a more formal structure LLC’s must keep business records separate from member’s personal records. LLC’s must file a separate tax return whereas sole proprietorship owners can include business income on their personal 1040 schedule C tax return. As stated above co-mingling of personal and business accounts could result in revocation of liability protections by offending members of the LLC.

When starting a new venture entrepreneurs will benefit from examining the various aspects of each business entity type. For some businesses a sole proprietorship is just fine, for others an LLC is a safer bet. It’s a good idea to get some expert advice on the ins and outs and pros and cons of each structure in relation to your business. 

Tom Bulger, CPA has a wealth of knowledge, expertise and experience helping entrepreneurs choose the right business model to launch their dreams. Contact Tom Bulger for answers to all your start-up questions.

Have you recently expanded from a sole proprietorship to an LLC? How was the process? Did it improve access to capital? Do you have greater piece of mind knowing your assets are protected? Share your comments below.

Check back for the next post in our series on business entity tax structures. We will cover partnerships; limited liability and general, and begin looking into corporations.

Is Sole Proprietorship the best choice for start-up entrepreneurs and small business?

When launching a new business owners must decide which tax structure will best suit their venture today and in the future. There is no right answer for each type of business because each entrepreneur has unique goals and plans to achieve those goals. In this post we will examine the pros and cons of Sole Proprietorships to help you decide if it’s the right choice for your new venture.

The Pros of Sole Proprietorship

Sole Proprietorship is an unincorporated classification and by far the most popular for small business just getting off the ground. Organizing as a Sole Proprietor is simple and inexpensive.

• Income from your Sole Proprietorship is reported on your individual tax return form 1040 schedule C.
• Sole Proprietorship allows for the entrepreneur to start and stop business activities at any time.
• Choosing a Sole Proprietorship allows the entrepreneur to avoid the traditionally higher corporate tax rates, while still being able to report most business losses on their personal income tax return and possibly lowering their overall business and personal tax burden.
• Sole Proprietorship is advantageous for independent contractors, freelancers and those who experience periods of underemployment or unemployment.

The Cons of Sole Proprietorship

The main problem with Sole Proprietorship is that your personal assets are not protected. If in the course of doing business you are unable to pay any debts or liabilities with funds from the business, creditors can go after your home and or any other personal assets to settle the debt. 

• If your new venture involves producing heavily regulated consumer goods like food, medicine and toys or if you provide professional advice in your service, these are considered high-risk enterprises for Sole Proprietorship. In addition to the regulations these are highly litigious business arenas. Therefore, your business must have the financial resources to cover the many potential liabilities.
• It is also important to consider where you want to take your new venture. If you are planning on seeking outside investment, most venture capitalist will only deal with incorporated start-ups.

Beyond Sole Proprietorship there are several tax structures to examine when deciding on how to organize your business. Tom Bulger CPA can help you decide which model is best for your new or existing business. Contact Tom Bulger today. 

Do you operate a small business under the Sole Proprietor classification and wonder about protection of your assets? Share your questions and concerns below. Check back for our next post on the pros and cons of organizing as a Limited Liability Corporation (LLC).
 

Happy Employees Bring a Good Return on Investment

Small business owners are always looking for a good return on investment to help grow their business. Is a new POS system worth the cost? Should we increase our advertising budgets? What demographics are we missing in our social networking campaigns.

However, one of the most important assets in any business is human resources. Business owners often overlook the incredible ROI that can be achieved by creating a happy, healthy workplace.

According to a study by SHRM, the Society for Human Resource Management, when factoring in all costs like reduced productivity, recruiting, interviewing, hiring and training it costs an average of $3,500.00 to replace one $8.00 per hour employee.

Many business owners don't realize the high cost of employee turnover on their bottom line...

• Replacing an entry-level employee cost your business 30-50% of that employee's annual salary
• For mid-level employees its 150% of their salary
• High level or specialized worker replacement costs a whopping 400% of their salary

Some employee turnover is inevitable and even desirable to bring in fresh energy and new perspectives or replace under performing employees with more skilled and productive ones. But beyond the normal flow of unavoidable turnover there are many simple solutions to ensure a high rate of good employee retention.

Design a comprehensive employee training structure

Business owners can't expect employees to carry out the duties of their job with out proper training. In addition, ongoing education via seminars, webinars conferences and workshops increase the skills of your current employees instead of having to hire more talent. From the employee's perspective this demonstrates your commitment to them as a valued member of the team.

Know what your employees face on a daily basis

Small Business owners are busy and often away from their sales or production floor and have no idea of the challenges their employees have in day-to-day operations. Make yourself aware of all aspects of their job, in other words take a walk in their shoes. This practice will not only foment loyalty among staff but may alert you to issues that need your attention.

Recognize and reward even the routine and mundane

Everyone from the cleaning crew to your VP in charge needs to be recognized and rewarded for his or her good work. Employees are much more content when they can see the impact they have on the success of your business. No one wants to feel like their contributions are meaningless or unrecognized by their organization.

Provide incentives that matter

Perks are great, so long as your employees desire those perks. You may think offering a discount on merchandise is nice, but ultimately it benefits you as part of your employee's salary is going right back into your pocket. In addition to things like discounts try to offer incentives that are purely about rewarding them for their good work.

Be a good role model

Strong leadership is key to retaining your top performers and keeping them happy. When an employee goes above and beyond put them in a mentorship or supervisory role. In this capacity they help to create a culture of the behaviors you desire. They lead by example and have a positive effect on the entire workforce. Conversely, toxic or negative speech and attitudes from co-workers can send a top performer out the door. Take swift action to correct the undesired behavior before it creates a hostile work environment.

Think of your employees as valuable assets. Your investment in them will bring solid returns through increased productivity, and avoiding the high cost of turnover. Tom Bulger, CPA specializes in helping small business owners create leadership platforms that foster a strong happy workforce. Contact Tom for advice on how to successfully implement these practices into your small business.

Are you a small business owner or manager with high employee retention rates? What measures have you put in place to keep your staff happy? Share you comments below or post them on our Facebook page.