Small Business FAQs
Selecting the appropriate organization for your small business depends on several crucial factors, including the number of owners involved, desired liability protection, tax implications, management structure, and long-term objectives. Common options to consider are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Seeking guidance from an attorney or business advisor will assist you in assessing your needs and making an informed decision.
To establish your business, you typically need to file specific legal documents with the state. These may include articles of incorporation for corporations, articles of organization for LLCs, and partnership agreements for partnerships. Depending on your business structure and state regulations, additional filings might be necessary.
Business taxes encompass a range of obligations, such as federal and state income tax, self-employment tax, sales tax, and payroll taxes. The specific taxes you’re required to pay depend on your business structure and activities. It’s advisable to seek guidance from a tax professional who can help you understand your tax liabilities, ensure compliance, and facilitate proper payment.
While online forms may seem convenient, involving a lawyer ensures that your business formation process adheres to legal requirements and aligns with your specific needs. A lawyer provides personalized advice, resolves complex legal issues, ensures compliance with state laws, and safeguards your interests throughout the process.
To form a corporation, you generally need to choose a unique business name, file articles of incorporation with the relevant state authority, issue stock to shareholders, and create bylaws governing internal affairs. Consulting an attorney streamlines the process and guarantees compliance.
The provision of benefits to workers depends on factors such as the number of employees, business nature, and applicable labor laws. Certain benefits, like workers’ compensation and specific retirement plans, may be legally mandated, while others are offered voluntarily to attract and retain talent.
“Writing off” business expenses refers to deducting eligible expenses from your taxable income, reducing the amount of income subject to tax. Proper record-keeping and adherence to tax regulations are crucial to ensure that expenses are legitimate and qualify for deduction.
Depending on your business structure, such as operating as a sole proprietorship or general partnership, personal property can be at risk in the event of a business-related lawsuit. However, forming a separate legal entity, such as an LLC or corporation, generally provides personal liability protection, shielding personal assets from such lawsuits.
While LLCs offer numerous advantages, there are a few drawbacks to consider. Some common disadvantages include potential self-employment taxes on all income, limited options for raising capital through stock issuance, additional administrative requirements compared to sole proprietorships, and potential variations in state laws and regulations governing LLCs.
An S Corporation (S Corp) is a type of corporation that, to avoid double taxation, elects to pass corporate income, losses, deductions, and credits through to its shareholders. Consequently, the business itself is not taxed at the corporate level, and shareholders report the corporation’s income or losses on their individual tax returns.
A standard operating agreement is a legal document that outlines the internal workings and procedures of an LLC. It covers topics like ownership percentages, voting rights, profit distribution, management responsibilities, dispute resolution, and the process for adding or removing members. While not always mandatory, a well-drafted operating agreement is highly recommended as it clarifies the rights and obligations of LLC members, establishes decision-making rules, and helps prevent future disputes.
The contractual needs of every business vary. Commonly used contracts include employment contracts, non-disclosure and non-compete agreements, independent contractor agreements, partnership agreements, joint venture agreements, sales contracts, buy-sell agreements, and lease agreements. It’s recommended to have a business lawyer draft or review your company’s contracts.
While a comprehensive explanation requires more than a paragraph, in short, both corporations and LLCs provide personal asset protection when formed and operated correctly. Corporations generally have more formal requirements, such as annual meetings and minutes. Conversely, LLCs offer more flexibility in structuring profit allocations.
Operationally, the two corporations are the same. The only difference is how each entity is taxed. A C corporation is subject to double taxation, where the corporation is taxed once on its profits, and then if any shareholder dividends are issued, the shareholders are then taxed on receipt of those dividends (even though that money has already been taxed once on the corporate level).
With an S corporation, however, all of the profits and losses of the corporation flow down to the shareholder level where the money is only taxed once. Not every corporation can qualify to be an S corporation. For example, the corporation must have less than 100 shareholders, it must only have one class of stock (i.e., you cannot have common and preferred shares), and, generally speaking, every shareholder must be an individual or qualified trust (no entity ownership). There are additional rules and restrictions that apply.