Business owners, particularly small business owners, often learn hard lessons on the fly while turning a promising idea into a profitable reality. The possibility of lawsuits, divorce or bankruptcy is the last thing you want to consider while making your dream come true, but you must arrange for asset protection in advance. If you wait until someone files a claim against you, you’re too late.
The following are a few tips for people amid their first dip into the pool of capitalism.
What business structure is best for me?
While you may not know the gritty details, most people have heard of a Limited Liability Corporation (LLC). As the name suggests, an LLC allows you to limit your personal liability. This is the popular choice for entrepreneurs and people hesitant to start a sole proprietorship over concerns about increased personal liability. An LLC can be formed with as little as one member. Some other benefits of an LLC are: (a) flexibility in ownership structure, (b) pass-through taxation, meaning that it can be taxed as a partnership or a corporation, and (c) lower regulatory costs than for corporations.
A Family Limited Partnership (FLP) is also an option when two or more family members contribute to a business where you are the general (lead) partner, and the others are limited partners. One of the main advantages of an FLP is that it allows individuals to gift FLP interests tax-free to other individuals every year up to the annual gift tax exclusion.
A corporation structure, sometimes called a “C Corp,” is generally meant for medium and large businesses that answer to shareholders and a board of directors. This structure provides the most protection from personal liability, but it is also far more expensive to set up and requires extensive record-keeping and reporting. It should be noted, however, that the owners (or shareholders) of a C Corp are taxed separately from the entity.
An S Corporation, or “S Corp,” structure allows the owner(s) to avoid the double taxation that C Corps face. Moreover, S Corp, just like an LLC, is known as a “pass-through entity” because they pay no corporate tax. However, the bar is high in terms of initial and ongoing costs and tax qualifications, including increased scrutiny by the IRS.
Insurance
It seems obvious, but small businesses that are tight on cash may consider foregoing business insurance. But consider this: a small savings right now could lead to a giant loss down the road in the event of a lawsuit.
Succession planning
If you’re well into your successful business venture, at a certain age, you will need to start thinking about the future. If you retire, become sick or incapacitated, or pass away unexpectedly, you want to ensure the business doesn’t suffer. Some of your options include selling the business to a partner or training someone to take the helm someday. Moreover, in the later stages of your life, you may consider transferring your business into a trust, which would potentially allow you to qualify for some government benefits if needed.
Speak to an experienced attorney
We saved the most crucial one for last. Business owners frequently have a strong do-it-yourself mentality. Unfortunately, for various legal reasons, many of the tips above are not the type of thing one wants to pull up their bootstraps and try for themselves. A mistake in compliance, for example, can theoretically end with expensive fines or other legal issues. Therefore, it is crucial to have an experienced attorney on your side assisting you with any questions or issues that may arise.