To protect your business and yourself, there are potentially 5 areas you HAVE to address at the outset to make sure you avoid problems down the road. From how you structure your business to protecting your business name, it all involves a process that you shouldn’t take lightly.
It seems like everyone is saying they have a business nowadays, but does the IRS agree with you?
Well, why does it matter?
It matters because, with a business, you can use business losses to offset your income when filing taxes. With a hobby, you cannot deduct more than you have earned. You also can’t claim negative hobby income on your taxes. —> Hobby Loss Rule
Many legit businesses start out with a loss their first few years, but the IRS expects that you set up your business with a plan to make a profit. Then there are those individuals that just set up their business, but they are really just hobbies, in order to claim expenses and losses on their taxes. The IRS frowns on the latter of course. In order to prevent the IRS from considering your business a hobby, check out these guidelines straight from their website: Read more
This topic is not only important in how you pay the person that you’re hiring but especially important during tax season because it makes a difference in how the worker will pay taxes.
Employees are paid a salary or an hourly wage with possible overtime. They are taxed on their income when you, the employer, withhold federal and state income taxes as well as FICA taxes from their paychecks.
For an independent contractor, on the other hand, you do NOT withhold federal or state taxes or FICA from the amount you pay them. The independent contractor will pay their own income taxes, also known as self-employment taxes.
The main motivator for incorporation for many small business owners is for asset and liability protection. It doesn’t matter if your business is full-time or if it is a side hustle, your risk for a lawsuit is just as real. You wouldn’t want your house or personal property to be exposed to risk from customers and creditors, would you?
Just because you form an LLC or Corporation doesn't mean that you are 100% protected from personal liability Click To Tweet
Just because you form an LLC or Corporation doesn’t mean that you are 100% protected from personal liability though. In certain situations, courts can ignore your limited liability status and hold members, officers, directors or shareholders personally liable for business debts. They call this piercing the corporate veil. If this happens, it means that creditors can go after the business owners’ home, bank account and/or other assets to satisfy the business debt.
Factors that courts consider in piercing the corporate veil include:
- Whether the business engaged in fraudulent behavior
- Whether the business failed to follow corporate formalities
- Whether the business was actually funded and treated as a separate entity
To reduce the likelihood of such liability, you have to make sure that you adhere to all the rules and procedures that come with business formation and also keep your business separate from your personal life.
First, make sure that you ALWAYS use your business name when you are doing business.
Second, make sure that you follow ALL corporate formalities. You should have an operating agreement if you are an LLC, or bylaws if you are a Corporation. For corporations, make sure to record your meeting minutes and issue stock properly. For both LLCs and Corporations, make sure to keep your funds totally separate from that of your business. Business Funds should NEVER be in the same bank account as personal funds. Keep taxation separate! Your corporate taxes should never be paid from a personal account. Also pay your business’s bills from your business account and your personal bills from your personal account. Making these distinctions distinguishes your business as a unique entity for liability purposes.
All of the legal procedures can be overwhelming, but they don’t have to be. You don’t have to do it all by yourself. Protection your business and protecting yourself from liability is important so allow the StartUp Pro to help you form your LLC TODAY. Let me take care of your paperwork while you focus on the growth of your new business. Contact me today!
Learn about the difference between each business entity here.
Let me start by stating that the business entity that you choose can make or break your business. NO exaggeration. Each entity has its pros and cons. Some require more paperwork than others. Some protect you from liability whereas others have zero protection.
This is what results when one person starts a business and files NO paperwork. There are no fees, making it relatively easy to start. A single individual owns the entire business and all of its assets and the U.S. government makes no distinction between the business and its owner. What this means is that during tax time you claim all profits and losses on your personal income tax return. It also means that you are liable for all claims or debts against your business.
You can operate your sole proprietorship under your legal name or under a fictitious name. If you do go with a fictitious name, you will need to file a DBA or “doing business as” certificate in the office of the county in which you operate your business.
General Partnerships are similar to Sole Proprietorships except that General Partnerships include two or more individuals. If partners agree to form a business together then you have a general partnership (Yes, that simple). As with a sole proprietorship, you need to register your DBA with your county clerk just like the sole proprietorship. Make sure to also formalize your partnership with a partnership agreement to outline how the business will be run.
Also like sole proprietorships, general partnerships leave you open to personal liability. Every partner is FULLY liable for claims against the business and the other partners. Partners are also liable for all debts. General partnerships are similar to sole proprietorships for tax purposes. They are “pass-through” entities, meaning that the partnership’s income and expenses are reported on each partner’s personal income tax return.
LIMITED LIABILITY COMPANY (LLC)
LLCs are my favorite business entity for many reasons. An LLC is a lot easier to form than a corporation and they don’t require as much paperwork. LLCs offer the taxation benefits of a partnership and are easier to manage than a corporation.Members of an LLC are shielded from personal liability for the business’ debts and obligations. Exceptions to this rule exist in cases of misconduct.
The corporation is the most expensive and difficult business structure to form. I recommend hiring an attorney to help you customize corporate documents for your business needs. In most states, you must file Articles of Incorporation, create bylaws and organizational resolutions that specify the operating rules for the corporation, appoint a board of directors and issue stock certificates to your initial shareholders. This last step can be complicated because stock certificates must comply with federal securities laws. Almost all states allow one-person corporations, where the business owner serves as officer, director, and shareholder.
Of all the different business types, corporations are the hardest to maintain. Corporations must hold annual board meetings and shareholder meetings. Most decisions in running the corporation must be made by a formal vote and (in most states) documented in meeting minutes. The biggest advantage of forming a corporation is that you cannot be held personally liable for the corporation’s debts or legal obligations, except in case of misconduct. At tax time, corporations are generally subjected to “double taxation” (C Corporation) unless S Corporation Status has been filed for with the IRS.
A corporation created for some type of public benefit is called a nonprofit corporation. Formation of a nonprofit in your state does not automatically give it tax-exempt status, but you can certainly apply for such status under IRS Code, section 501(c)(3). Contact me if you need help applying for your 501(c)3.
Unless the goal of your business is not to make money then this is probably not the structure that you’re looking for.
For more information on the different business structures and how you can apply for them, set up a consultation with me TODAY!
What is an operating agreement?
An operating is a contract that sets out all the operating terms of an LLC. It dictates what happens in the event of a dispute between members, who runs the business and how, what compensation is to be received by the members and also how membership interests are transferred. An operating agreement is similar to the bylaws that assist in running a corporation or the partnership agreement which helps run partnerships.