Starting a Business

Today's blog is about business structure. So you want to start a business. The first thing you think of is a

name that ends with an LLC. Why? Because this is what you heard is best. But then there is the C Corp,

the S Corp, partnership, exempt or non profit organization and then there is the sole proprietorship.

So which do you choose? How do you structure your company? What classification should you choose?

The first thing you recall from listening to others or maybe from reading is to start an LLC. Why?

Because you were told your personal assets are not tied to the company. What is an LLC? It is the

acronym for Limited Liability Company. What does that even mean? Yes, it does mean that the owner's

personal assets are protected against company debts. Somehow this has become the gold standard for

business structure in this country. I say it is a dream because for the most part, finance companies

typically require a guarantor for financing.

Say you want to buy a car. The financing has to be in an owner's name but registered to the company

which means the owner is liable for the car loan. When a member/owner of an LLC becomes a guarantor,

his/her personal assets become tied to the company. So it is a fallacy to think that an LLC gives its

owners 100% protection. The only way owners of an LLC is protected 100% is by incurring debt that is

strictly and 100% owed by the company secured by the company's assets. But this applies to a C-Corp

and an S-Corp as well.

No different than an LLC, a C corp and an S Corp are its own entity. They are all considered individuals,

a "person" separate from it owners who are shareholders or members. No different than the LLC,

corporate debt typically requires an owner to guarantee the loan. Of course, I am not referring to large

companies like Coca Cola or Facebook because they are establised, have assets and can stand alone

without any of it shareholders/owners to guarantee any loans. You are a small business owner so guess

what? You have to guarantee any loan whether your company is an LLC, a partnership, a C corp or an S

Corp so your personal assets are not protected. Plus an LLC is a state designation. You will not find a

form to file taxes for an LLC. There is a form 1120 for a C corp, an 1120S for an S corp, a 1065 for a

Partnership, Schedule C within a form 1040 individual, or a 990 for an exempt organization. So in

essence, the federal government doesn't really recognize an LLC. You have to classify yourself as one of those

federal classes from the beginning or apply to reclassify later.

So what do you do? What should you choose? It depends on a lot of factors. And whatever you decide

you have to file the right tax form at the right time. An S-Corp and a partnership has to file taxes by

March 15th.

The reason is these two entities are called pass through entities where losses and income

passes through the company to its owners i.e. shareholders or partners. The company's loss or income is

reported in a Schedule K for each owner respective to their percent ownership. This schedule then has to

be included in the owner's personal taxes. This is why the company taxes are due one month prior to the April

15th deadline for the rest of us.

This schedule will then be in the IRS database on time to be matched up to

individual returns. Having been in the tax business it is amazing to me to see so many people with

partnership or S-Corp who are clueless about the March 15th deadline.

April 15th deadline are for individuals and C corp. Just like a sole proprietor, a C corp does not pass

through its income or loss. Income or loss belongs to the owner which is the corporation itself. Profits can

be shared with shareholders during the tax year so the reporting of this distribution of profits through

1099DIV or dividends is typically done by the end of January. Thus there is no earlier deadline necessary

for the C corp. So the question to ask is, do you want your income or loss to be passed onto your personal

taxes? If you don't, how do you feel about double taxation; company net profit is taxed, and then the

dividends paid to you is taxed again. It is not a simple answer, is it? And what is the difference between a

partnership and an S corp anyway cos it sounds pretty much the same, doesn't it?

Let me enlighten you. There are two main differences; one, a partner is liable for company debts when

shareholders are not in an S Corp, and two, a partnership income is subject to self employment taxes but

an S corp shareholder profit is not. So are dividends from a C corp not subject to self employment tax.

There are other subtle differences between these 3 from simplicity in organization to complex tax

implications and benefits. I don't want to confuse you with the complexities. I want to make it simple for

you to decide which one to choose. Basic rule is how many people are involved in the business. If it is

just you, the best option is sole proprietorship. Everything is done one time and reported once during tax

time unless you have employees or contractors that you have to issue a 1099 to. Even if there are two

people, sometimes it is best to keep 2 separate sole proprietorship and then merge as a partnership once

the parameters are set and responsibilities are more defined. What if you want to start a family business

and you have youngsters? Do you really want to issue your youngsters a schedule K for them to file

taxes? Or should you choose a C corp and have them reinvest their share of profits into the company for

expansion? Bottom line is there should be strategy involved in choosing the right structure. It should

require a well thought out strategic plan.

Formalizing a business by registering with the federal and state government is not rocket science but

deciding the structure is a little more complex. This is where I come in. For individual assistance, I am a

master strategist and I will help you determine which business structure you should choose. For example,

the typical husband and wife team doesn't have to form partnership. There is another classification that I

did not refer to in my podcast, and that is "joint venture". You and your spouse running a business

together can be classified as a joint venture and include it in your individual joint or separate tax return.

You split the income and expenses 50/50. Pending this is agreeable to both, of course. Not all partnership

is 50/50 but all joint ventures are. This is just an example of extra information that I cannot share in such

a short time. There is so much more for me to share and I will as time goes.

On that note, I hope you have learned something from listening to my podcast and reading this blog.

Meanwhile, if I can help you with choosing the right structure, please submit the form or call me. My first

goal is to educate and empower you with the tools you need to be successful.

Signing off,

Dr. KnowitAli.