Blogs by William Manchee
Defending the Small Business - Part 21 Form of Business
2/19/2009 5:43:30 PM
Small business owners often make the mistake of doing business as a sole proprietorship. This is usually a mistake...
One of the first decisions that will have to be made during the reorganization process is what type of entity will best suit your business. Most small businesses come to me as sole proprietorships. This rarely is the optimal form of a business as it is important to keep the individual and business separated for efficiency and protection of personal assets. Usually a limited liability company, corporation, or limited partnership is what is needed.
A corporation has traditionally been the vehicle of choice for small businesses. It is a distinct entity, which is itself a taxpayer. It provides centralized management, liability protection to its stockholders, and free transferability of interests. It is well understood and recognized as the “normal” way to do business in America.
A limited liability company is a more recent breed of business entity, but it is rapidly becoming the obvious choice for the SBO. It provides the same centralized management, free transferability of interest, and liability protection, but has the option of being taxed itself or being taxed like a partnership. Normally, the SBO will elect to be taxed like a partnership so the profit and loss of the business will pass through to the owner directly. This eliminates any possibility of having profits taxed as a dividend and allows the SBO to use business losses to offset other personal income.
Occasionally a limited partnership will be the vehicle of choice if there are investors who want to put money in the business, but do not want operational responsibility. Limited partnerships can often provide tax advantages and other advantages that a corporation or limited liability company cannot. Therefore it is important to look closely at the business with your accountant and attorney and determine which type of organization is best.
Once the choice has been made a conversion must take place. This can be a fairly complicated process that must be done very carefully to avoid adverse tax consequences. If a conversion is not possible, sometimes the best approach is to shut down the old business and start over in a new business vehicle. Either way, it is important to get this done quickly, as the business vehicle in which you operate is the foundation upon which you will build your newly restructured business, and you want it to be strong and durable.
Next - Accounting and Bookkeeping
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