Talking business.
Today we discuss some in’s and out’s of starting a business and financial discipline to be successful.
How easy is it to start a business?
All it takes is an idea. However, from regulatory perspective, there are steps needed to document the business as a separate legal entity from a person.
Now a person can have a business type called a Sole Proprietorship which would be represented on a Schedule C tax filing at the end of the year. The business owner uses their Social Security Number without having to apply for a Federal EIN (Employer Identification Number). Perhaps they have a business name and website created as well. Even those aren’t necessary. This is probably the easiest, in terms of set up.
Once you move on to other business types, like LLCs or S and C-Corps, there are more legal requirements and/or tax impacts. If we want to consider a hierarchy from simple to complex, it would be:
Sole Proprietor
Limited Liability Company
S-Corp
C-Corp
So it really comes down to what it is you are trying to accomplish with your business.
What do people need to consider before jumping in?
A strong starting point is to keep the end in mind. What this comes down to is proper planning. Here are some questions to consider:
Do you have a vision and mission dialed in?
What is the product/service?
How will your customers find it?
Do you want shareholders/owners?
How do you want to handle tax liabilities? Perhaps you are community focused and may need tax-exempt status for example.
Will you hire others, or have contractors?
The answers to these questions will lead us to a more clear idea of what entity type best suits the business. Of course there are many factors to take into account and it would certainly be advisable to speak with experts or advisors.
How does someone know which business structure is right for them?
It really is a matter of defining the purpose and need of the business, putting the solution into that.
For example: Number of Owners. Perhaps you want a public company, which in theory can have an unlimited number of owners, or shareholders. An S-Corp structure would not fit this idea due to the closely held nature of the S-Corp and the limits on ownership.
Another example: taxation with dividends or distributions. A C-corp will pay taxes and then be taxed on dividends or distributions, known as a double-tax. Now, S-Corps and LLCs have a pass-through where dividends and distributions are taxed at the owner level.
This is why planning can be helpful - to identify early on the best course of action so that there are no major issues down the road. It is possible, however, to restructure businesses. This happens a lot, especially if a company has grown rapidly or the leadership decides to change direction in some way. Restructuring can be disruptive, though, financially or operationally.
