How to protect your small business ideas with business structures
If you have the ingenuity to come up with a stellar idea, turn it into a business, and make a profit from it, you probably have the foresight to protect that valuable entity. Here, we talk about how you can protect your small business ideas by keeping them behind your corporate castle wall – your company structure.
Business structures, or entities, generally fall into one of these categories:
- Single owner
- camaraderie
- limited liability company
- corporation
Each type has pros and cons. Here, we will consider some of them.
Tea Single owner it is an unincorporated business run by one person, and is by far the simplest form of business to operate. The reasons are simple:
- Doesn’t require much, if any, registration or paperwork
- It is very easy to start, change or close
- The value of the business (as seen by both buyers and the IRS) is based on the owner’s skills and assets, not stock.
Sole proprietorship can be a simple form and is often best when capital and staff are limited, but there are clear disadvantages:
- Capital is limited to the owner’s capital or what the owner can generate
- The owner cannot be an employee of the business for tax purposes
- There is unlimited liability for the actions and debts of the company.
Liability is a problem in the operation of any business, and increasingly with the litigious society in which we operate. Responsibility is the ever-present dinosaur in the cave, ready to explode at any moment. You may not know when, why, or how you might burst onto your business scene, but history has shown (as recently as yesterday or any day) that IT DOES HAPPEN.
Simple can be good, but it can also be dangerous. When you operate as a sole proprietor, your capital, assets, and skills make up the business, and these assets become your payment in the event of a lawsuit. A court can freeze assets, force the sale of a residence, seize bank accounts, and many other financial nightmares you can imagine.
Fortunately, there are other business entity structures more geared towards protecting your small business ideas and thriving business.
Another business is camaraderie. It is a relationship between 2 or more people who come together to carry out a trade or business. There are some advantages:
- It involves more than one member, so it has greater capital potential than a sole proprietorship
- Combine the management skills of several people.
- Has pass through taxes
The association also has some disadvantages:
- Decision-making authority is divided
- Partners cannot be employed for tax purposes
- Unlimited, joint and several liability between members
Like the sole proprietorship, partnership members may be liable for all actions and debts of the business. In addition, there is joint and several liability, which means that each partner is responsible for the actions and debts of the other partners.
It doesn’t take much thinking to see how this can (and often does) create problems. Different people have different ideals, different risk tolerances, and different methods. If one partner decides to act in a way that another partner believes is risky, the other partners often have no choice but to dissolve the partnership. Because of this, many associations do not stay intact for long.
Tea limited liability company it is a more flexible business structure and, in many ways, more desirable. An LLC can be treated as a sole proprietorship, partnership, or corporation. A single default member is a sole proprietorship, 2 or more default members are partnerships, and anyone can choose to be taxed as a corporation or subchapter S corporation.
The advantages are:
- Flexibility: Members can be individuals, other partnerships, other corporations, or even other LLCs.
- Tax management and transfer flexibility
- Members have limited liability for the actions and debts of the LLC
Disadvantages:
- It is governed by the laws of the state.
- You are subject to a base annual tax (in some states) that increases after earnings reach a specified limit
- All members must also pay taxes on individual earnings.
Above all, the LLC is a very smart and flexible way to set up a business, but the main advantage is the limited liability for the partners. This is an increasingly valuable quality as income and earnings increase, because more money means greater chances of being sued. Following the old “risk and reward” equation, as the reward increases, so does the risk.
corporations They are an advantageous way to establish a business, but especially when profits and scope of operations increase. The law treats a corporation as a legal entity, similar to a person. It has perpetual life, which means it does not die when the originator dies; The corporation remains a legal entity until such time as it is formally dissolved.
advantages:
- The transfer of ownership is relatively simple.
- It is easy to raise capital and expand the business.
- All shareholders may be employees of the corporation, and have limited liability
Disadvantages:
- Double taxation (C Corp), which means corporations’ profits are taxed and shareholders’ profits are taxed
- It can be difficult and expensive to organize.
- Corporate officers must follow procedures, such as board meetings, corporate minutes, and others.
Again, corporations are ideal for any business that has expanding operations, substantial profits, or defined liability. Some businesses, by their very nature, involve more risk and some businesses are quite complex and require a more centralized structure. For these reasons and more, the corporation may be the best form of business to operate.
Corporations were designed to encourage business. The corporate veil is strong and protects people from losing their personal assets in a business catastrophe like a lawsuit, and allows them to grow and expand without fear. However, the veil can be pierced, but essentially in only one way: fraud. Fraudulent activity among a corporation’s officers can remove protection and expose them.