Planning For Business Owners

Ten Critical Questions About Your Business

1. Have you organized your business as either a corporation or a limited liability company to protect your personal assets from your business's creditors?
2. If you are operating as a corporation, in order to save taxes, did you initially determine whether you should be an S corporation or a C corporation?
3. If you are incorporated, do you observe the necessary corporate formalities to protect your corporate status or if you are operating as a limited liability company, do you have a written Operating Agreement?
4. If your business is owned by more than one individual, do you have a shareholder buy-sell agreement or a limited liability company operating agreement which addresses what will happen in the event of a disagreement among the owners, an owner wanting to sell their interest, an owner’s divorce, or the disability or death of an owner?
5. If you have a buy-sell agreement, does it provide a valuation formula and how payment will be financed?
6. Do you have all employees sign a written employment agreement, have an employee manual (which has been reviewed by legal counsel) and have your key employees sign employment agreements containing legally enforceable non-competition agreements, prohibiting their solicitation of your customers and/or employees, and preventing disclosure of confidential business information?
7. Have you obtained trademarks and/or service marks to protect the names and logos of your business and your products or services under applicable state and federal law?
8. Have you had an attorney review any leases, contracts or other agreements of the business?
9. Does your estate plan provide for what would happen to your business upon your death?
10. Do you know what your business is worth and have you put in place an exit strategy?

Begin with the end in mind

When you start a business, you need to select the right entity to minimize taxes and limit your potential personal liability. You also want to be sure you have thought about your exit strategy.

Deciding on the right form of business ownership is a critical decision. Options include a sole proprietorship, general partnership, limited liability company or a corporation, including both subchapter C and subchapter S corporations. Each has different advantages and disadvantages. Sole Proprietorship

The sole proprietorship is a business owned by one individual. It exists by default if you begin business and don’t form an entity. The business and owner are effectively one and the same. The greatest disadvantage is that you have unlimited liability. You are liable for the debts and obligations of the business. For tax purposes, you will report your business revenues and expenses on Schedule C of your individual tax return.

Partnership

A partnership exists when you join together with someone else to engage in business. Your relationship will be governed by your partnership agreement. While oral partnership agreements are completely legal and enforceable, it is better practice to have such agreements in writing to hopefully avoid disputes.

The biggest problem is that as a partner you and the other partners are each personally liable for all of the debts, obligations, and expenses of the partnership. For tax purposes, partnerships are treated as flow through entities. This means that you report your proportionate share of the partnership income and loss on your individual tax return.

Limited Liability Company

A limited liability company (“LLC”) is another type of business entity. To form an LLC you must file Articles of Organization with the Idaho Secretary of State. As a member of an LLC, your relationship with the other members will be governed by the terms of an Operating Agreement. It is best to enter into a written Operating Agreement to be sure the terms are what you intend. If there is no written agreement, by statute certain default terms will be deemed to exist. And they may not be at all what you want.

Under Idaho law, an LLC is treated similar to corporation in that the members generally do not have personal liability for debts of the LLC. For tax purposes, an LLC is treated much like a partnership in that it is a flow through entity. This means that you report your proportionate share of the LLC income and loss on your individual tax return.

Corporation

A corporation is formed by filing Articles of Incorporation with the Idaho Secretary of State. You will also need bylaws to document the formalities regarding the operation of the corporation. If there is more than one shareholder, you should also have a separate agreement among the shareholders so there is no misunderstanding about your relationship. Provided certain formalities are observed, the corporation generally provides you with limited liability protection against debts of the corporation.

Both the corporation and each of its shareholders must file tax returns, either as a C corporation or as an S corporation, if it so elects and certain qualifications are satisfied. The income or losses incurred by a C corporation is reported on the corporation tax return. Any tax due will be paid by the corporation and you cannot deduct any losses on your personal return. This results in the double taxation that is often cited as a great detriment to corporations and their shareholders.

S Corporation

If a corporation qualifies, its shareholders may elect to be taxed pursuant to subchapter S of the Internal Revenue Code. Subchapter S allows corporations to avoid double taxation if they meet certain requirements. In essence, the corporation is treated much like a partnership in that it is a flow through entity. This means that you generally report your proportionate share of the S corporation revenue and expense on your individual tax return.