Tuesday, October 25, 2011

Resources for a Small Business

As I've been working towards my own business, I wanted to provide some resources I have found for a person looking to start a small business. This list is certainly not complete but should help someone who is unsure of where to start.

On which entity to form your company: Want to be a sole proprietor,  partnership or corporation but unsure of the advantages and disadvantages? Let's discuss! There are three basic business entities, sole proprietorship, partnership and corporation as already stated. Choosing which one to form your company can have long-term consequences. Let's start with a basic definition of each

Sole Proprietorship: This means there is one owner for the company. This does not mean you can't hire any employees, I've heard that asked before. A sole prop is not a separate legal entity according to the law (important later).

Partnership: Instead of one owner, like the sole prop, a partnership has two or more owners. This functions similar to a sole prop in the sense that a partnership is not a separate legal entity.

Corporation: A corporation has many owners, generally, called stockholders. The important element here is that a corp is a separate legal entity.

Now we have some basic information; we can begin talking about some pros and cons.

Pros for Sole Proprietorship:

1) Very easy to start. You could start advertising online and begin a sole proprietorship right now if you wanted. Some states have various laws regarding starting a sole prop, such as a DBA name.

2) A sole proprietorship is considered a pass-through entity for tax purposes. What is that? A sole proprietorship is not taxed separately. A person who owns this type of business will file a Schedule C and pay income taxes based on the businesses net income.

3) Very easy to disband. Done with your business? Generally, there is very little work to do. You might need to notify the state if you were paying sales tax that your business is done. Don't forget to keep records for filing taxes that year. There might be some other small things you need to do but it is considered easy to stop your business.

Cons for a Sole Proprietorship:

1) Unlimited liability. This cannot be stressed enough. Remember how I said a sole proprietorship is not a separate legal entity? This is why. If you own a sole proprietorship, your business is you! If someone slips and falls in your store, you could be held 100% liable as a business. This is the biggest concern about this business type.


2) Harder to raise capital. As a sole proprietorship, it can be harder to get capital because of credit ratings which can affect a loan. There is no stock that you can issue for this type of business as well. Venture capitalists will want a company formed if they are going to invest in a business. This can make expanding more difficult.

Those are only some of the pros and cons of running a sole proprietorship. Moving on to a partnership.

Pros for a Partnership:

1) While not as easy as a sole proprietorship, a partnership can be easily formed. Forming a partnership generally involves filling out a partnership agreement and filing with your state.

2) More talent available. With having more than one owner comes the possibility of owners filling niche roles. One partner could handle the accounting work while the other handles purchasing. This allows partners to utilize their strengths. Be careful, this could have drawbacks if a partner decides to leave.

3) A partnership is considered a pass through entity. Partners will pay tax on their own income, the partnership will not pay income taxes itself.

Cons for a Partnership:

1) Unlimited liability (again). The same rules apply from the sole proprietor. Note: There are certain partnerships you can form that will eliminate the unlimited liability, generally. An LLP is a partnership with limited liability. There are ways to be sued and held fully liable even while having limited liability but that is beyond the scope of what I can get into today.

2) Having a partner. If you want to run your own business, do you want someone else who can make a large claim to the income? This can be seen as a disadvantage in the long-term. A partner can also be held liable for what the other partner did, even if the innocent partner was not aware.

A sole proprietor and a partnership have similar pros and cons as seen. Let's move on to corporations.

Pros for a Corporation:

1) Limited liability! I've already touched on how bad unlimited liability is; having limited liability without doing anything is a great pro towards a corporation. There are ways to be fully responsible for the actions of a corporation, called piercing the corporate veil, but that is another topic for another time.

2) Easiest to raise capital. A corporation has stock they can issue, attract venture capitalists and generally have an easier ability to expand operations over the other forms of business.

3) It's reassuring to the customer. Personally, and from what I've noticed, a customer will look upon a business that has taken the time to go through the initial paperwork more positively than a sole proprietorship. I see this a lot with businesses named after the city they are in. This does not mean they are bad but, to me, it indicates a lack of planning and execution.

Cons for a Corporation:

1) Can be expensive to start. Filing all the paperwork with your state can be expensive depending on the scope and size of your planned business. Filing the articles of incorporation in my state will run $125. Now, if you're concerned about $125 fee to start your corporation then you might want to reconsider your business.

2) Double taxation. Double taxation comes into play with a corporation because the corporation will pay taxes at the corporate level and distributions to shareholders are taxed as well. There are ways around this by filing as an S-corp or an LLC. Is it a huge con? I don't think it is as a small corporation has easy ways to avoid this. 

Whew, that was long. I think this list provides enough basic information to help a person to choose what kind of business entity they should choose. If you are looking to start a business, please do more research on each type.

Useful links for budding entrepreneurs:  Here are some links I think anyone can find useful.

Reddit's small business /r/ Has many small business owners where you can ask questions. Generally a pretty nice community. Just don't spam.

IRS's website on businesses  Also a great site to find out tax information if you can't afford an accountant.

SBA's website  The Small Business Administration's website has tons of useful information on business plans, loans, and other assistance to a starting company.

Check with your state's website for sales tax information, filing requirements and other support you can find. In my state I can use a website that will take my information and present it to banks and then any interested banks will contact me about a loan.

I hope some of this information helps anyone. A lot of what I've typed I have used to help me towards my goal. I hope it can also help someone towards their goal.

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