Marklin
Financial Services LLC

Interim, Part-time, and Outsourced CFO Services

 

"John handled the entire company set up for us; contacting the attorney, deciding on the appropriate form of entity and filing of all forms. He took care of it all so I could deal with other issues."
-Aash Thakkar, partner of ALJ Consulting, LLC

 

 

Undoubtedly, one of the earliest decisions a new business owner has to decide upon is what type of entity to choose from. It is very easy to relegate this decision to a low priority status, or to download a few online forms without thinking of the consequences.

I knew an owner who bypassed setting up an entity and instead chose a Sole Proprietorship. Later, he was sued for a faulty product, leaving his personal assets at risk. He quickly tried to form an LLC thinking it would take care of his troubles. But he was too late. You cannot retroactively form a company to cover a preexisting risk.

Another owner downloaded a LLC form, but gave little attention to the potential consequences of partners wanting to leave the business. He assumed it would never happen and never looked at the wording. When a partner did want to leave, the end result was not what he thought it was.

If you are considering starting a business and want to discuss the pros and cons of entity types, give me a call. I can hook you up with an attorney with reasonable rates who will walk you through the entire process. Spend you time on your business and leave the technical and legal work to reasonably priced and experienced experts.

-John Marklin


 

 

Forming an Entity

One question that will undoubtedly loom large and potentially ominous to a new business owner is the type of business entity.

Businesses can choose from a variety of entities depending upon their needs. Each entity brings different sets of rules and flexibility. Formal entities need to be registered with the State Corporation Commission. The entity format carries over to the type of tax return that is filed, and some are easier to complete than others.

The simplest form of organization is a sole proprietorship. This can be accomplished quickly and inexpensively. The tax forms used are simple and a part of the Form 1040: schedule C. The main problem with a sole proprietorship is that is lacks liability protection to the owner’s personal assets. Therefore the owner’s personal assets, like a home and investments, could be at risk if the business is sued.

All entity forms other than a sole proprietorship (LLC, S Corporation, C Corporation) allow for liability protection for the owner’s assets. Therefore, if an LLC, S Corp or C Corp is sued, the assets of the LLC, S Corp or C Corp could be at risk, but the owner’s personal assets are protected.

The other reasons to choose between an LLC, S Corp or C Corp is usually due to taxation or flexibility. An LLC and S Corp are handled similarly for tax purposes in that the entities’ profits flow to the owner’s 1040 personal tax return. A C Corp has its own tax rates for its profits and it pays a double tax on the dividends when distributed to the owners.

An LLC is much more flexible in assigning ownership percentage than an S Corp. However, there can be a slight advantage to an S Corp over an LLC in self employment taxes to the owner.

In summary:

    Sole proprietorship
       - Easy,
       - Taxed on Schedule C of 1040,
       - Owner’s personal assets not protected.

    LLC
       - More flexible than S Corp,
       - Taxes flow through to 1040,
       - Owner’s personal assets are protected.

    S Corp
       - Profits taxed like an LLC,
       - Some potential savings in self employment taxes
         of owner,
       - Many rules to follow regarding annual meetings
         and minutes,
       - Owner’s personal assets are protected.

    C Corp
       - Profits taxed at separate rates and a second tax is  
         paid on dividends when distributed to owners,
       - Many rules to follow regarding annual meetings
         and minutes,
       - Owner’s personal assets are protected.

The costs to set up an entity varies. Online web sites charge from $150 to $500, plus filing fees (around $100 in some states) to set up entities. A good, local attorney could a little more for specialized service. Of course, larger law firms will be much more expensive.