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If you’ve got a great idea for your own business, you need the kind of straightforward ...
If you’ve got a great idea for your own business, you need the kind of straightforward advice you’ll find here — the kind of advice you’d normally only get from business schools and MBA courses. Small Business Kit For Dummies, Second Edition covers all the basics on:
In addition to the basics of business, you’ll also find top-class advice on more advanced business basics, like business plans, the ins and outs of contracts, and using the Internet to expand your business. For entrepreneurs large and small, this comprehensive resource offers authoritative guidance on all your biggest business concerns, and offers unbeatable advice on such topics as:
In addition, the book includes a CD-ROM full of helpful resources — forms, contracts, and even sample versions of the most popular software for small businesses. With Small Business Kit For Dummies you’ll find all the tools you need to get your small business up and running — and keep it running for years and years to come.
Part I: Starting Up Your Business.
Chapter 1: Choosing Your Business Entity.
Chapter 2: Business Plans.
Chapter 3: Organizing a Corporation.
Part II: Money Matters.
Chapter 4: Raising Capital for Your Business.
Chapter 5: Bookkeeping and Accounting Basics.
Chapter 6: Small Business Tax Basics.
Part III: Employee and Consultant Issues.
Chapter 7: Employee Hiring Tools.
Chapter 8: Motivating and Retaining Employees.
Chapter 9: Avoiding Employee Problems.
Chapter 10: Independent Contractor and Consultant Agreements.
Part IV: Bulletproofing Your Business.
Chapter 11: Key Contracts.
Chapter 12: Legal Issues.
Chapter 13: Protecting Your Ideas and Inventions.
Chapter 14: Avoiding Customer Problems.
Chapter 15: Real Estate Leases for Your Business.
Part V: Spreading the Word.
Chapter 16: Web Sites, Your Business, and You.
Chapter 17: Press Releases and Dealing with the Press.
Part VI: The Part of Tens.
Chapter 18: Ten Ideas to Make Your Business More Successful.
Chapter 19: Ten Great Web Sites for Small Businesses.
Chapter 20: (Almost) Ten Great Publications for Small Businesses.
Appendix: What’s on the CD-ROM.
End-User License Agreement.
In This Chapter
* Flying solo: Sole proprietorships
* Getting a grip on partnerships
* Checking out corporations
* Looking into LLCs
When starting a business, you need to decide early on what legal form the business should take. The common choices are sole proprietorships, general partnerships, limited partnerships, C corporations, S corporations, and LLCs (Limited Liability Companies). Each entity has advantages and disadvantages, and the right choice depends on the nature of your proposed business and various tax and liability issues. In this chapter, I outline the key points that you need to know about choosing the right entity for your business.
Form 1-1 on the CD-ROM (and shown later in this chapter) summarizes the key differences between various types of business entities. You need to pay special attention to tax and liability issues.
Setting Up Sole Proprietorships
Some businesses are formed as sole proprietorships. In this case, the business has only one owner - you. Sole proprietorships are easier to set up than corporations or other entities.
STATE BY STATE
To establish a sole proprietorship, you typically need to file a fictitious name certificate at a local or state governmental office if you're doing business under a name different than your own. This certificate, in essence, notifies the world who the business's true owner is, such as "John Smith, d.b.a. Blue Vision Flowers." The d.b.a. abbreviation stands for "doing business as."
Sole proprietorships are not advisable if you plan to do any significant business because you face unlimited liability for the business's debts - a real disadvantage. Plus, you can have a difficult time growing the business and attracting investors to a sole proprietorship.
The following key points characterize a sole proprietorship:
Creating a Partnership
You can set up your business as a partnership consisting of two or more partners. Partnerships come in three types: general, limited, and limited liability. Limited Liability Companies (LLCs) are similar in some ways to partnerships. I describe LLCs in the section "Helpful Hybrids: Limited Liability Companies" later in this chapter.
General partnerships consist of two or more partners. You can create general partnerships with little or no statutory formalities, although you probably want to have a Partnership Agreement that sets forth the partners' rights and obligations.
Avoid general partnerships like the plague! Each partner in a general partnership may be liable for the debts and obligations of the partnership - not a good situation to be in if things go bad. If you insist on having a partnership, make sure that you have a well-drafted Partnership Agreement and a lot of insurance.
General partnerships tend to be easy to establish and can be more informal than business entities like corporations. But the disadvantage of the partners' horrendous unlimited personal liability more than offsets this advantage.
The following key points typically characterize general partnerships:
Partnership Agreements can be very complicated. This area is one where working with a lawyer is definitely to your advantage.
Form 1-2 on the CD-ROM includes a checklist of issues that you should consider when drafting a Partnership Agreement.
A limited partnership consists of one or more general partners and one or more limited partners. The general partners typically get to make all business decisions, and the limited partners are typically passive investors.
Many businesses have used limited partnerships for owning real estate, restaurants, oil- and gas-related activities, and venture capital funds.
A limited partnership requires you to file an organizational form certificate with the Secretary of State. A Limited Partnership Agreement, setting out the rights and obligations of the general and limited partners, is also important.
Limited partnerships can raise money from passive investors while allowing the general partner to retain near total control of how the business is run. Limited partnerships can be good business structures, especially for real estate holdings, but LLCs (which you can find in the section "Helpful Hybrids: Limited Liability Companies" later in this chapter) or corporations are typically better for operating businesses.
The following key points typically characterize limited partnerships:
If you're going to have a limited partnership, review Form 1-3 on the CD-ROM for a checklist of the items that you should consider including in a Limited Partnership Agreement.
Limited Liability Partnerships
Limited Liability Partnerships (LLPs) are a new entity authorized by certain state laws. LLPs are basically general partnerships with a liability shield for partners. Liability shields come in two basic types: one for tort matters (like negligence claims), and the other to insulate the partners from the partnership's tort and contract obligations.
STATE BY STATE
In many jurisdictions, the law allows only professionals to use LLPs. For example, California LLPs typically are formed only by lawyers and accountants.
LLPs are typically taxed as pass-through entities, with the partners, not the entity, paying taxes on the business's earnings.
LLPs are useful in one primary sense - if you have an existing general partnership, and you can qualify for LLP status, you should absolutely convert to LLP status. Such a conversion has little downside, and you can start to protect the partners from the business's various liabilities.
For the most part, however, you should form new businesses as corporations or LLCs, rather than LLPs. (See the section "Helpful Hybrids: Limited Liability Companies" later in this chapter for a discussion of LLCs.)
Corps Is Short for Corporation, Not Corpses
A corporation is a separate legal entity formed under a state corporation law. The corporation has shareholders who own stock in the company, a board of directors who have responsibility for overall management of the company, and officers who run its day-to-day affairs.
A key advantage of a corporation is that if it is properly formed and operated, the shareholders are shielded from the corporation's debts and liabilities. Should something go wrong, you only risk the amount that you have invested in the corporation. And, if someone sues the corporation, you're not personally responsible for any damages that a court may award (unless you fail to follow the rules for forming and operating the corporation, as I explain in Chapter 12).
The corporate business entity doesn't protect professionals, such as accountants, doctors, or lawyers, from personal liability for their negligence or malpractice, but it can shield them from personal liability for the acts of their co-owners.
The two main kinds of corporations are C corporations and S corporations. The difference between the two is in the type of tax treatment on the business's earnings. In a C corporation, the government taxes the business's income at the corporate level, and if the corporation distributes any dividends to the shareholders, the shareholders can also pay a tax on that income. This practice is sometimes referred to as double taxation. In an S corporation, the government considers that the business income has passed through to the shareholders who are then taxed on their pro rata share (the percentage that they own) of the corporation's income.
The word "corporation" usually refers to a C corporation. C corporations have limited liability and are well-understood entities that can accommodate many businesses. On the downside, corporations require that you follow a fair number of formalities and make several governmental filings. For C corporations, the double tax can be a real expense.
Form 1-4 on the CD-ROM contains a checklist of issues to consider when you decide to form a corporation. I tell you how to correctly form a corporation in Chapter 3.
Corporations make a lot of sense for new businesses - especially if you plan to grow the business and attract investors. Also, you can sell a corporation more easily than almost any other entity. And, if you have hopes of taking the company public, you almost surely have to make the business a corporation.
Excerpted from Small Business Kit For Dummies by Richard D. Harroch Excerpted by permission.
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