Sole Proprietorship

January 31, 2013

 

 

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Often when business owners start a business, they start out as sole proprietors. As a sole proprietor, the owner is the operator of the business. Many artisans and self-contractors operate their businesses as sole proprietorships because they are easy to set up. They owners use their own social security number to pay taxes. Sole proprietors often do not delegate their duties and they do not have to set up a trade name in order to operate the business.

Examples of sole proprietorships are hair dressers, landscapers, artists, designers, and daycare. These workers typically make under $100,000 per year and do all the work themselves. The business owner would be responsible for all debts and he/she alone receives all of the profits. They only disadvantage of the sole proprietorship is that he/she would have difficulty receiving funding or a business line of credit from a bank.

In order to qualify for funding, a business owner must change to another form of organization, such as a corporation, S- corporation, LLC, or partnership, which would give him more potential for profits.


Continuing a Business Partnership with Life Insurance

October 2, 2012

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When people decide to start a business, one can set up a sole proprietorship, one can start a partnership, or one can start a corporation. While the sole proprietor can pass the business along to the family, the partners in a business must decide in advance how each one’s interest in the business will be resolved upon one’s death, disability, retirement, or when one is forced to leave the business.

Each of the partners comes into the business with a set of skills or core competencies which enables the business to thrive. When one of the partners leaves the business, the other has to decide how to continue the business in light of the expertise which is no longer available. They would want to seek another partner with the same qualifications as the one leaving the business.

It takes time to locate a suitable partner and the surviving partner would need money to continue the business so that they would maintain the same profitability as before. Therefore, an agreement must be made as to how to continue the business in view of the loss which the surviving partner would suffer. A buy sell agreement is the way in which the partners could reach a consensus about the management of the business after one of the partners leaves. The buy sell agreement would be funded with life insurance on each of the partners.

The buy sell agreement would outline who could buy the deceased or disabled partner’s share of the business, the value of that share of the business, and the description of the circumstances under which the buy sell agreement would would be exercised. Those reasons could be death, disability, retirement, or a decision of one of the partner to leave the business. This would enable the continuation of the business without economic loss.

Once the partners agree on the circumstances, they would have an attorney prepare the agreement and then purchase life insurance to cover each of the partners lives. When one leaves the business, becomes disabled or expires, the other partner would collect the insurance money. The agreement could be a cross purchase plan in which each buys out the other’s interest in the business, or it could be an entity or stock redemption plan in which the partner’s shares in the business are redeemed. They the other partner would not have to purchase life insurance.

In conclusion, partners can agree on the disposition of the other’s share in the business upon death, disability, retirement, or withdrawal from the business. This would enable the business to continue running smoothly.


Limited Liability Company or Non-Profit

September 20, 2011

There comes a time when sole proprietors must make a decision about how to register their company when they start growing. This is an important consideration, because having the right organization will enable the company to experience even more profits, and in some cases, protection against law suits.

When writing a business plan, one of the most important considerations is type of business organization to adopt for the company. The benefit of the non-profit organization is the ability to raise money from donors and not have to pay income or property taxes. Money is used to expand the company or to pay for its expenses. The non-profit organization does not issue shares of stock to its owners and does not have shareholders. The government tends to limit the amount of money a non-profit organization can make and monitors the organization through stringent reporting.

The limited liability company, on the other hand, is an unincorporated association. It has certain characteristics of both a corporation and a partnership or sole proprietorship and provides limited liability to its owners. The benefits of creating a limited liability company is that is flexibility in this type of organization, as a clause can be added to modify the agreement (“unless otherwise provided for in the operating agreement”). For income tax purposes, the entity is treated as a pass through entity. Some limited liability corpoation comanies include lawyers and attorneys who often operate as partnershps, such as McGladrey & Pullen LLP, one of the largest accounting firms in the country.

For example, owners of the corporation can raise money by selling shares of company stock. There is a greater potential for more income compared to a non-profit organization, as there are no limitations to the amount of money one could raise. There can be one or multiple members of the LLC. If there is one owner, the person would report the income on their tax return. However, if there are multiple members, they must file a form 1065 for income tax purposes and each one receives a form K-1 for reporting on their own income taxes.

The members may elect to be taxed as a corporation where the dividends earned from the shares and the distribution of the dividends would be taxed as they are received by the members.

The members may elect, instead, to be treated as an S Corporation, where there would be self-employment tax savings.

Advantages:
1. Less paperwork and record keeping than a C-corporation,
2. Members are taxed on their profits individually
3. Members can decide how they want to be taxed, i.e., sole proprietor, partnership, S- corporation, or C-corporation
4. There is no double taxation unless the members elect to be taxed as a C- corporation,
5. LLC’s are treated as a separate entity in most states,
6. Only one natural person is required to set the business up as an LLC,
7. There is more protection against a “hungry investor”

Disadvantages:
1. If there is no agreement between the members, there could be a problem. To avoid problems, the members must outline their governance and protective provisions in an operating agreement or similar governing document.
2. It may be difficult to raise money as investors may be more comfortable with the corporation and IPO (Initial Public Offering) as a way to invest money. If that is the case, the owner(s) may elect to dissolve the organization and reform under a corporation.

If business owners are unsure of the type of organization which is beneficial for them, they should consult their attorney.