- Steps to Take in Forming a Business
There are two essential steps that should be kept in mind and evaluated before deciding on starting a Small Business:
Decide on the type of business
A. What experience in this type of business do you have? Were you an employee? Manager? Owner? Apprentice?
B. Do you understand ALL phases of the business's operation?
C. What technical knowledge relating to the business do you possess?
D. Does a market exist for your service or product?
E. Can you develop the market enough to obtain the revenues needed?
Your choice of business should be based upon the knowledge and experience relating to that business that you possess. If you lack either of these criteria, it would be wise to work in a similar, already established business. Building a profitable enterprise is difficult enough without having to learn the business from the bottom up at the same time.
Select the type of organization (legal structure)
A. Individual proprietorship
Also called sole proprietorship, this is the simplest and least expensive way to organize a business. The owner registers the business name, secures the licenses necessary for operation, applies for a tax identification number, and begins operations. He or she receives the profits, assumes the losses, and is personally responsible for the debts and obligations of the enterprise. Income and expenses are reported in the owner's personal tax returns, and profits are taxed at his or her income tax rates.
To summarize the features of the sole proprietorship:
1. It is the simplest of all legal forms of organization.
2. The owner is usually the manager and does not share control of the business with anyone.
3. Income and expenses are reported on the owner's individual
income tax return, and profits are taxed at the owner's rate.
Today, more couples are starting businesses together. The number of sole proprietorships, excluding farms, that were jointly owned by a husband and wife soared 82 percent between 1980 and 1985 (the most recent year for which data are available) for a grand total of 482,993, according to the Small Business Administration. This increase far exceeded the 47 percent gain in sole proprietorships owned by women and the 31 percent increase in those owned by men.
There are many reasons for the growth of this business sector. Because of the proliferation of personal computers, new telephone services, and fax machines, more and more people are beginning to work out of their homes. Franchising is making it possible for people without much business experience to get in the act. Well-publicized success stories of entrepreneurial couples are encouraging other couples to try their hand at running a business. Women, because of job loss and the "glass ceiling," are starting businesses at twice the rate of men—and many are forming these businesses as partnerships with their husbands.
In 1998 women owned about 35 percent of the nation's sole proprietorships, a marked rise from the 26 percent share they had in 1980, according to the SBA. Women formed businesses 1.5 times faster than men during the 1990s; the SBA notes that they owned 38 percent of small businesses in the year 2000. According to one SBA official, entrepreneurship is, for the first time, being viewed as a career alternative by young women in their 20s.
B. Partnership
A general partnership is a business organization owned by two or more people who agree to form a partnership. In most cases, the partners share equally in the ownership and management responsibilities as defined in a formal (written) partnership agreement. The distribution of profits or losses, management duties, and other issues should also be defined in the written partnership agreement. The partners are also equally liable for all debts and other business obligations. A general partnership is not a taxable entity; income and expenses are reported on federal and state information returns filed by the partner-ship. Partners are taxed on their individual share of the partnership's profits (less expenses) and at their individual income tax rates.
A general partnership is relatively easy and inexpensive to form. Although not required by law, a written agreement is recommended, and you should consult legal counsel before entering into such an agreement.
A limited partnership is composed of at least one general partner and one limited partner. The general partner has the right and responsibility to manage the business and is liable for all other debts and obligations. The limited partner cannot participate in or manage the affairs of the business or be held liable for any more than his or her equity investment. The limited partner invests to experience equity (capital) growth only and will normally be held liable as a general partner if he/ she participates in management. Limited partnerships must be formed in compliance with statutory requirements, including tax and securities laws. They are more ex-pensive and complex to organize than general partnerships and should not be entered into without legal advice and representation.
These are some points to remember about partnerships:
1. In a partnership, two or more people own a business jointly.
2. You and your prospective partners should have an agreement, in writing, that sets forth the guidelines under which the firm will operate and/or dissolve. It is advisable to consult an attorney to assist in the formation of this agreement.
3. Partnerships must file a U.S. Partnership Return of Income (IRS Form 1065).
a. This form is an information return.
b. Partners report their share of the business's profit or loss on their individual tax return.
C. Corporation
A corporation is owned by one or more shareholders and is a separate legal entity from them. Corporations fall into a number of categories for tax purposes, but in all cases they must be formed in compliance with the statutory requirements of the state in which they are incorporated. The shareholders elect a board of directors, which is responsible for controlling and managing the company. Because it is a separate legal entity, the corporation, not its share holders, is generally liable for all debts, contractual obligations, claims, and lawsuits.
A company can elect to become an S corporation if it meets the respective state laws for S incorporation. In this event, the income and expenses of the business pass directly to he shareholders in proportion to their percentage of ownership in the company—very similar to a partnership. The profits, if any, are then taxed at their individual income tax rates. Usually the S corporation is a closely held business where most of the shareholders actively participate in its management. However, this is not a requirement for S status. Be sure to check with your state regarding the number of shareholders it will allow to form an S corporation and thoroughly investigate and comply with the regulatory laws that apply. Though the S corporation can offer limited liability exposure for its shareholders and has certain tax advantages over the C corporation, you should seek professional advice before deciding which form is the most appropriate.
To sum up the distinguishing characteristics of the corporation:
1. It is the most formal and complex of all legal structures.
2. It is formed under articles of incorporation, which are filed with the secretary of state and governed by laws of that state.
3. Its business profits are taxed separately (but not always exclusively) from the earnings of owners and executives.
4. The corporation is a separate legal entity from its shareholders and has a separate, continuous life.
5. The corporation is often the last stage in a film's evolution. Most businesses start as proprietorships or partnerships. If the business experiences continuous growth over a period of years, incorporation may become necessary (for adequate control) or advantageous. If and when you decide to incorporate, it is advisable to consult an accountant or tax consultant to review the possible tax advantages and disadvantages. Further information concerning the various types of legal structure can be obtained from SBA publication pamphlet MP 25. Do not, however, substitute the information contained in this publication for legal advice. As with partnerships, it is essential to seek competent professional advice in order to protect your interests when forming a corporation.
D. Other forms of business organization
Professional corporations, nonprofit corporations, business trusts, and cooperative associations are other forms of business organization. Because they are all regulated by state and federal laws and involve legal, financial, and accounting issues, you shout d not attempt to organize your business along any of these lines without legal and accounting assistance.
The organizational structure of a business can be changed under certain circumstances. For instance, it may be advantageous to change from a C corporation to an S corporation or vice versa. But this can be very troublesome. The primary guidelines are to determine the structure that will best serve the interests of all participants involved and to keep it as simple as possible.
B. Do you understand ALL phases of the business's operation?
C. What technical knowledge relating to the business do you possess?
D. Does a market exist for your service or product?
E. Can you develop the market enough to obtain the revenues needed?
Your choice of business should be based upon the knowledge and experience relating to that business that you possess. If you lack either of these criteria, it would be wise to work in a similar, already established business. Building a profitable enterprise is difficult enough without having to learn the business from the bottom up at the same time.
Select the type of organization (legal structure)
A. Individual proprietorship
Also called sole proprietorship, this is the simplest and least expensive way to organize a business. The owner registers the business name, secures the licenses necessary for operation, applies for a tax identification number, and begins operations. He or she receives the profits, assumes the losses, and is personally responsible for the debts and obligations of the enterprise. Income and expenses are reported in the owner's personal tax returns, and profits are taxed at his or her income tax rates.
To summarize the features of the sole proprietorship:
1. It is the simplest of all legal forms of organization.
2. The owner is usually the manager and does not share control of the business with anyone.
3. Income and expenses are reported on the owner's individual
income tax return, and profits are taxed at the owner's rate.
Today, more couples are starting businesses together. The number of sole proprietorships, excluding farms, that were jointly owned by a husband and wife soared 82 percent between 1980 and 1985 (the most recent year for which data are available) for a grand total of 482,993, according to the Small Business Administration. This increase far exceeded the 47 percent gain in sole proprietorships owned by women and the 31 percent increase in those owned by men.
There are many reasons for the growth of this business sector. Because of the proliferation of personal computers, new telephone services, and fax machines, more and more people are beginning to work out of their homes. Franchising is making it possible for people without much business experience to get in the act. Well-publicized success stories of entrepreneurial couples are encouraging other couples to try their hand at running a business. Women, because of job loss and the "glass ceiling," are starting businesses at twice the rate of men—and many are forming these businesses as partnerships with their husbands.
In 1998 women owned about 35 percent of the nation's sole proprietorships, a marked rise from the 26 percent share they had in 1980, according to the SBA. Women formed businesses 1.5 times faster than men during the 1990s; the SBA notes that they owned 38 percent of small businesses in the year 2000. According to one SBA official, entrepreneurship is, for the first time, being viewed as a career alternative by young women in their 20s.
B. Partnership
A general partnership is a business organization owned by two or more people who agree to form a partnership. In most cases, the partners share equally in the ownership and management responsibilities as defined in a formal (written) partnership agreement. The distribution of profits or losses, management duties, and other issues should also be defined in the written partnership agreement. The partners are also equally liable for all debts and other business obligations. A general partnership is not a taxable entity; income and expenses are reported on federal and state information returns filed by the partner-ship. Partners are taxed on their individual share of the partnership's profits (less expenses) and at their individual income tax rates.
A general partnership is relatively easy and inexpensive to form. Although not required by law, a written agreement is recommended, and you should consult legal counsel before entering into such an agreement.
A limited partnership is composed of at least one general partner and one limited partner. The general partner has the right and responsibility to manage the business and is liable for all other debts and obligations. The limited partner cannot participate in or manage the affairs of the business or be held liable for any more than his or her equity investment. The limited partner invests to experience equity (capital) growth only and will normally be held liable as a general partner if he/ she participates in management. Limited partnerships must be formed in compliance with statutory requirements, including tax and securities laws. They are more ex-pensive and complex to organize than general partnerships and should not be entered into without legal advice and representation.
These are some points to remember about partnerships:
1. In a partnership, two or more people own a business jointly.
2. You and your prospective partners should have an agreement, in writing, that sets forth the guidelines under which the firm will operate and/or dissolve. It is advisable to consult an attorney to assist in the formation of this agreement.
3. Partnerships must file a U.S. Partnership Return of Income (IRS Form 1065).
a. This form is an information return.
b. Partners report their share of the business's profit or loss on their individual tax return.
C. Corporation
A corporation is owned by one or more shareholders and is a separate legal entity from them. Corporations fall into a number of categories for tax purposes, but in all cases they must be formed in compliance with the statutory requirements of the state in which they are incorporated. The shareholders elect a board of directors, which is responsible for controlling and managing the company. Because it is a separate legal entity, the corporation, not its share holders, is generally liable for all debts, contractual obligations, claims, and lawsuits.
A company can elect to become an S corporation if it meets the respective state laws for S incorporation. In this event, the income and expenses of the business pass directly to he shareholders in proportion to their percentage of ownership in the company—very similar to a partnership. The profits, if any, are then taxed at their individual income tax rates. Usually the S corporation is a closely held business where most of the shareholders actively participate in its management. However, this is not a requirement for S status. Be sure to check with your state regarding the number of shareholders it will allow to form an S corporation and thoroughly investigate and comply with the regulatory laws that apply. Though the S corporation can offer limited liability exposure for its shareholders and has certain tax advantages over the C corporation, you should seek professional advice before deciding which form is the most appropriate.
To sum up the distinguishing characteristics of the corporation:
1. It is the most formal and complex of all legal structures.
2. It is formed under articles of incorporation, which are filed with the secretary of state and governed by laws of that state.
3. Its business profits are taxed separately (but not always exclusively) from the earnings of owners and executives.
4. The corporation is a separate legal entity from its shareholders and has a separate, continuous life.
5. The corporation is often the last stage in a film's evolution. Most businesses start as proprietorships or partnerships. If the business experiences continuous growth over a period of years, incorporation may become necessary (for adequate control) or advantageous. If and when you decide to incorporate, it is advisable to consult an accountant or tax consultant to review the possible tax advantages and disadvantages. Further information concerning the various types of legal structure can be obtained from SBA publication pamphlet MP 25. Do not, however, substitute the information contained in this publication for legal advice. As with partnerships, it is essential to seek competent professional advice in order to protect your interests when forming a corporation.
D. Other forms of business organization
Professional corporations, nonprofit corporations, business trusts, and cooperative associations are other forms of business organization. Because they are all regulated by state and federal laws and involve legal, financial, and accounting issues, you shout d not attempt to organize your business along any of these lines without legal and accounting assistance.
The organizational structure of a business can be changed under certain circumstances. For instance, it may be advantageous to change from a C corporation to an S corporation or vice versa. But this can be very troublesome. The primary guidelines are to determine the structure that will best serve the interests of all participants involved and to keep it as simple as possible.