Want to Start a Successful Business?
Be Sure to Choose the Best Legal Entity for Establishing Your Business
Author: Judy Brown, Attorney
Whether you own a cupcake shop, or you’re thinking of owning a Healthcare Business, how you organize your business is important.
Cindy was an excellent baker. She was especially fond of making cupcakes. Her baking was always a huge success at parties and events. Eventually friends and acquaintances started asking Cindy to bake cupcakes for their own events. Cindy started taking orders and reserving space at local farmer’s markets to sell her cupcakes. She rented some space in a commercial kitchen and began make cupcakes for profit. People raved about Cindy’s delicious cupcakes, and she even won a local baking contest.
While Cindy was a great baker, she was not a great businesswomen at first. She kept reasonable records of income and expenses, but she was so busy making tasty cupcakes that she never got around to considering the liability or tax ramifications of what she was doing. Cindy started her business in June, so it took a long time for March to roll around and force Cindy to consider the inevitable: the taxes she would have to pay on her income from cupcakes.
Cindy’s husband, Rob, was proud of all the baking Cindy was doing, but he was too busy at his job in outside sales to think about the ramifications of their new business. As March came around, Rob told his accountant about their new business. He was shocked by the amount of taxes that he and Cindy would have to pay. He was also unaware that they should have been paying some taxes quarterly based on yearly income estimates. Now they would have to pay a penalty for not paying these quarterly taxes. Cindy owed the IRS quite a large sum of money.
Cindy’s business was really in jeopardy from the taxes owed as a result of her success selling cupcakes. Luckily, Cindy and Rob were able to dig into their savings to pay the tax liability. Cindy wisely sought legal help to form the appropriate business entity under which she could sell her cupcakes without assuming so much personal liability. With the help of her lawyer, she was able to form a limited liability company giving her more protection for her business assets and a viable plan to take care of taxes over the course of the year. Cindy moved forward with her business and continued to tantalize taste buds with her cupcakes.
Establishing a Legal Business Entity
When you start a new business, you are rightfully passionate about your products or services. With all the excitement, it is easy to overlook the mundane details about organizing your business. You might not realize that starting a business exposes you to new liabilities. Whether you own a cupcake shop, or you’re thinking of owning a Healthcare Business, how you organize your business is important.
Choosing the right way to organize your new business is not an easy matter. You have a number of options, and you want to make sure you chose the optimal organization that provides the best protection without encumbering you with red tape and paperwork. Here are some basic forms of business organization:
Sole Proprietorship: This is the default organization when you start a business. You are basically identical to your business and personally assume responsibility for its debts and liabilities.
General Partnership: This form of business is similar to a sole proprietorship except that more than one party is involved in the business. In this case both parties enter into an agreement to run a business. Both parties share the liabilities and debts of the business.
Limited Liability Company (LLC): A LLC provides some protection to its owners. The owners are not fully responsible for the debts and liabilities of the company. However, they are responsible for paying taxes on the revenue of the company.
S Corporation: This business entity is fully incorporated and has an independent legal status from its owners. The business owners are protected from any liabilities incurred by the corporation. The owners are responsible for taxes on the revenue generated. The corporation has an indefinite existence and can be bought and sold.
C Corporation: A C Corporation is taxed on all revenue separate from taxes owed by the business owners. It completely shields the business owners from any liabilities of the corporation. The owners are not responsible for taxes on the revenue of the business; they will only pay taxes if they receive a salary or receive dividends on their shares.
Business organization is complex. An experienced small business lawyer helps you decide on the best option, understands all the responsibilities and liabilities you incur with each business form, and creates the legal documents necessary to legally establish a business.
It is easy to start a sole proprietorship. You simply start making business transactions. When you are starting up, this might be your best option. Once you start experiencing any kind of success, think more carefully about your business organization.
When you operate as a sole proprietor, you incur all the liabilities for your business. If something should go wrong, your personal assets are on the line. When someone sues your business, your personal savings are at risk as well as your home and any other assets you possess. There is no line between your personal assets and those of your business to protect you.
To protect your assets, organize your business in a form that limits your liability. Consider a limited liability company or an S corporation. A lawyer helps you examine your options, choose the best one for your business, and create the legal documentation required to establish a business entity.
Death and Taxes
There are two other important legal issues raised by running a business.
Taxes. Make sure you have a plan to cover any tax liability on the profits from your business.
Durability. If you want to be able to pass along your business to your heirs or to sell it to someone else, establish a business entity that takes on a life its own.
Ultimately, a small business lawyer sorts out the issues involved with death and taxes. You may have to fully incorporate your business in order to secure its existence beyond your lifetime. A C Corporation also provides personal tax protection.
If you have your own business, establish the right business entity to protect you from any liabilities or debts incurred by operating your business. Consult with an experienced business attorney to cover your bases. This frees you to focus on delivering superior products and services to your customers.
An experienced attorney can also show you how you can have the better legal protections afforded through a LLC structure, but gain all the tax advantages offered to an S Corporation. In other words, she can show you how to have your “cupcakes” and eat them too.
What To Do Next:
Owning a healthcare business is becoming an increasingly nuanced profession. ABS will train you and help you get clients, but regulations, Licensure and legal risks are always evolving, and working with an attorney who is up to date is essential for advising you of both risks and opportunities.
Schedule your free Business Success Strategy Session with Attorney Judy Brown by calling 817-313-3855 today. Connect with Judy on LinkedIn.