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When you have a product or service that you’re eager to present to the world (or at least to your target market), the logistical details can detract from your enthusiasm. Before you can officially “hang out your shingle”, there are so many important decisions to make. A less-committed entrepreneur might throw in the towel before really getting started. But that’s not you. You’re reading this article because you’re determined to see your idea through.
This article will cover two of the important decisions you’ll need to make before opening for business: (1) choosing a business structure and, (2) choosing a business name. Liability and tax concerns will factor into your choice of business structure. What’s in a (business) name? As you’ll see, a lot more than you thought.
Before deciding on one of the five options below, keep this in mind: the business structure you choose will influence everything from day-to-day operations, to taxes, to the level of risk concerning your personal assets. The ideal structure for your business will provide the right balance of legal protection and benefits.
The sole proprietorship is the simplest and most straightforward business structure. It’s an ideal option for businesses owned by one person. If you’ll use a business name other than your legal name, registering a sole proprietorship generally involves completing a “doing business as” (DBA) form with your local governing authority (county clerk’s office or Secretary of State in most states). During registration, a check will be performed to ensure that your “assumed” name isn’t already in use by another business. You’re automatically considered to be a sole proprietorship if you don’t register as any other business entity.
As a sole proprietor, you report your business’s income and expenses when filing your personal income tax return (Form 1040). This is accomplished by completing and attaching Schedule C – Profit or Loss from Business to your return. Should Schedule C’s bottom line indicate a loss, the amount of the loss can offset other income reported on your return. As a sole proprietor, Schedule SE – Self Employment Tax must also be completed to calculate how much self-employment tax you owe. This schedule is also filed with your Form 1040.
If your annual net earnings is $400 or more, you must make quarterly estimated tax payments to cover your tax liability. These equal payments are made on the 15th of April, June, September, and January. The amount of the quarterly payments depends on the adjusted gross income (AGI) on your personal tax return. If the prior year’s AGI is less than $150,000, the estimated tax payments must be at least 90 percent of the current year’s tax liability or 100 percent of the prior year’s liability, whichever is less.
If you plan to operate a low-risk business, a sole proprietorship may be a sound option. This option also provides a way to test your business idea in a simpler format before establishing a more complex business structure.
If your business will be owned and operated by two or more persons, consider structuring it as a partnership. There are two types of partnerships: general and limited.
In a general partnership, all partners actively operate the business and equally assume responsibility for its debts and obligations. Each general partner can take out loans and make decisions that will affect all partners (if the partnership agreement allows).
A limited partnership can have both general and limited partners. The general partners own and operate the business and assume responsibility for all obligations but the limited partners act as investors only; they don’t make decisions concerning the business and aren’t liable for any of the business’s obligations. Because of the required filings associated with limited partnerships, general partnerships are much easier to form.
It’s nice to have someone to share in the planning and operation of a business as well as the legal and financial responsibilities. A general partnership provides that but what happens if there is dissension among the partners? A written partnership agreement will protect your interest in the business should that occur. It’s a way of “laying all cards on the table” at the outset of establishing your business.
Here’s what the agreement should address:
A partnership doesn’t pay tax on its income but instead “passes through” any profits or losses to the individual partners. When filing their personal tax returns, each partner completes and attaches Schedule K-1 – Partner’s Share of Income, Deductions, Credits, etc. which discloses the partner’s share of partnership income, deductions and tax credits.
The corporate business structure is more complex to initiate than most other structures. Since a corporation is an entity that’s separate from its owners, there are more regulations and tax requirements to comply with and the paperwork involved can be daunting.
Once you’ve decided on a corporate name (which must include the word “Incorporated,” “Corporation,” “Company,” “Limited,” or an abbreviation of one of these words), contact the Secretary of State or the agency that’s responsible for registering corporations in your state. Ask for instructions, necessary forms and fee information.
Interpreting your state’s incorporation laws can be challenging for a layperson so this is best left to an attorney. If you feel confident that you can accomplish this without an attorney, there are books and software to help with the process. You’ll save on the attorney’s fee but the downside is that you could misinterpret one or more details in your state’s incorporation laws.
If you decide to forge ahead on your own, the next step is to prepare and file articles of incorporation. The articles must include the corporate name, purpose, names and addresses of the parties incorporating, the location of the corporation’s principal office, and the number of shares the corporation is authorized to issue. The filing fee is typically based on the number of authorized shares. Depending on your state, the articles may be filed online or by mail.
The person who signs the articles of incorporation must appoint the initial corporate directors who will serve on the board until the first annual meeting of shareholders (when the next term’s board members are elected). At this first board meeting, in addition to appointing corporate officers, the directors will generally select a corporate bank, authorize issuance of shares of stock, and set the corporation’s fiscal year.
Your state may require you to appoint a registered agent. This individual or company agrees to accept legal papers on your corporation’s behalf. The registered agent must have a physical street address in the same state as your corporation.
To establish the corporation’s operating rules, an internal document called bylaws should be adopted. Bylaws aren’t filed with the state and you’re not legally required to have them but they serve the purpose of (1) detailing responsibilities of the shareholders, directors and officers, (2) stating the intended frequency of stockholder meetings, and (3) helping show banks, creditors, the IRS, and others that your corporation is a legitimate entity.
Once your articles of incorporation are accepted, your state agency will send you a certificate of incorporation. It’s important that you follow the rules of incorporation required by state law which includes filing annual reports and holding annual meetings. If not, a court can dismantle your corporation and hold you and the other owners (shareholders) personally liable for the business’s debts.
It’s also important that you keep accurate financial records that show a distinction between the income and expenses of the corporation and that of the owners (shareholders). The corporation’s important papers such as minutes of shareholder meetings and stock certificates should be kept at the corporation’s principal office.
Not only is the income of a corporation taxed at federal and state levels, but any dividends distributed to shareholders are taxed at individual tax rates on each shareholder’s personal income tax return. To avoid paying tax on corporate income, it can be distributed to shareholders as salaries. Corporations aren’t required to pay tax on reasonable compensation (within IRS limits). The amount paid as salaries can be deducted on the corporation’s P&L statement as a business expense.
For business owners who want the liability protection of a standard (or C) corporation without the double taxation, an S corporation is the way to go.
With an S corporation, there’s only one level of federal tax to pay because the corporation’s income and losses are passed through to shareholders and included on their individual tax returns.
A limited liability company (LLC) is a business structure that combines the best features of a partnership with the best features of a corporation. Similar to an S corporation, owners of an LLC enjoy the liability protection of a standard corporation without the double taxation.
Unlike an S corporation, there’s no limit on the number of shareholders an LLC can have. In addition, all owners of the LLC are allowed to fully participate in operating the business.
Similar to partnerships, LLC’s don’t continue indefinitely. Some state statutes mandate that the LLC must dissolve after 30 or 40 years. If an owner withdraws, retires, or dies, the LLC dissolves.
To form an LLC, articles of organization must be filed with the secretary of state where the LLC is located. Some states also require that an operating agreement (similar to a partnership agreement) be filed.
With an LLC, there’s only one level of federal tax to pay because the LLC’s income and losses are passed through to the owners and included on their personal tax returns.
If you’ve decided on a business structure, it’s time to give your brand new venture a name. Naming your business may seem like an easy task — just pick something that sounds good and run with it. Contrary to what some entrepreneurs think, it’s not that simple. Choosing a business name requires thought and intention.
The business name that you choose can have an impact on your success. The wrong name won’t resonate with your customers and could hinder your marketing and branding efforts.
Here are some qualities you’ll find in a great business name:
The name is consistent with how you’re positioning your business in the marketplace. A name like Saks Fifth Avenue lets customers know they can expect a high-end shopping experience.
The name you choose for your business should not be confusingly similar to another business. If you choose a name that’s close to a competitor, not only will you confuse customers but you could be viewed as a copycat.
Shorter names (no more than four syllables) are easier to remember. Avoid using hyphens or special characters in the name.
Hard-to-spell names can confuse potential customers and make it difficult for them to find your business online. Save yourself from having to constantly correct misspellings of your business name.
A name like Bed Bath & Beyond conveys to potential customers that the retailer offers more than linens and accessories for the bedroom and bathroom. They could add an infinite number of home décor categories and the name still works. Pick a name for your business that doesn’t limit you to a specific product or area. “Cupcakes of Atlanta” won’t fit if the business adds cookies and expands into other cities.
Names that convey something meaningful and positive have a lot of appeal. Take internet radio station Pandora’s business name. In Greek mythology, Apollo gave Pandora the gift of music. If your name conjures up pleasant thoughts, your customers may respond to your business on an emotional level.
You’ve likely heard the story of how General Motors (GM) named one of its models “Nova” without realizing that the Spanish translation is “doesn’t go”. Not a good name for a car. Don’t use a name that you don’t know the meaning or history of.
Try to adopt a business name that gives some information about what your business does. When customers see your name, they’ll have a good idea of what product or service you provide.
You don’t want potential customers to find your business name uninspiring. It should be memorable and resonate with your target market. The catchy name Google started out as a joke about the search engine being able to search a googol (the number 1 followed by 100 zeros) of information.
It could be disheartening to spend a lot of time selecting the perfect business name only to have others mispronounce it. If it’s being pronounced correctly, does it sound good when said aloud?
Once you’ve selected the ideal name for your business, there are steps to take before officially registering your business with the appropriate government agency.
Perform an online search to see if someone else is already using that name. During the business registration process, a search will be performed to ensure that your name isn’t already in use but you can save time by doing a preliminary search.
If your online search reveals that no one is using your desired business name, check a site like GoDaddy.com to see if the .com domain name is available. Although domain extensions such as .net, .org, or .biz may be available, the .com domain will give your business a more established appearance and it’s what customers expect. If the .com domain is taken, track down the owner by using the “Whois” tool at GoDaddy and see if they’re willing to sell it.
Domain registrars often offer a discount for adding the domain extensions beyond “.com” so you may want to add them to your order to keep others from publishing web sites with a similar name.
Before paying to register your domain name, check the social media platforms you plan to use to ensure that your business name is available. You’ll want to have consistency in your online presence. For example, the web site coach.com has the following social media accounts:
Facebook.com/coach
Twitter.com/coach
Pinterest.com/coach
If the .com domain name and social media accounts in your desired name are available, grab them quickly. With over 500,000 businesses being started each month, names go fast.
During the registration of your chosen business structure, it will be revealed if your business name is available. That same process should keep others from using your registered name.
If you want additional name protection beyond what’s required for your business structure, get a trademark or service mark for your business name. Conduct a search at the US Patent & Trademark Office site at USPTO.gov to ensure that your chosen name isn’t similar to a business name that’s already been registered.
Even after you settle on a business structure, changes in the law can make that structure less favorable. Reassess your business structure periodically to ensure that it still provides you with the flexibility, liability protection and tax advantages you need.
There’s a lot that goes into successfully selecting a name for your business. Ideally, the name that you choose will help to build a strong company identity, resonate with your customers, and grow with your business.
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