Opening a new business means that you are likely to run into some of the most frequently asked questions facing new business owners. This is especially true if you’ve never made the jump into official entrepreneurship before. There is so much information online about how to open a business, what to do once you’ve opened, and how to sell. But, you’ll soon find out that actually opening and running a business can be much more complicated and involved.
Below are the answers to a few frequently asked questions facing new business owners.
Q: What are the most common business structures?
A: When you open your business, you have to choose what type of business structure to form:
- A sole proprietorship is the easiest business to form and will give you full control over your business. This is a good option for budding entrepreneurs who want to test the waters.
- A partnership may be the easiest way for two (or more) people (up to five) to form a business together. Partnerships may have general partners, or limited partners and there are advantages to each including passive treatment of income. This is a good choice for professionals who anticipate how their business will run for many years. All partners are in agreement about working together and executing responsibilities.
- An LLC, or, Limited Liability Company, will protect you from any personal liability in case your business fails. It’s a way of legally separating yourself from your business. You can also avoid corporate taxes with an LLC. Generally an LLC is the easiest and most straightforward option if other options are not clearly the right choice.
- A corporation, or, a C corp, is another way of separating your personal assets from your business. However, a C corp is much more involved than the other business entities above. The paper work and compliance requirements are also beyond what LLCs require. Owners often include people called “shareholders” and if one walks away, the business can keep running. C Corps are typically the best options for companies that expect to raise money or sell percentage ownership. C corps are notorious for “double taxation,” however you can avoid this. Note that the health deductions available to C Corps mean it deserves additional consideration as your choice of business.
- An S corp is great for solopreneurs and it helps you avoid paying taxes twice. Any profits or losses are passed through the owner’s personal income tax return. S Corps are easier to run than C Corps although more complicated to run and own than LLCs. Remember: raising money and selling partial or complete ownership of an S Corp is going to often be more difficult than a C Corp.
Q: How can I fund my business?
A: There are many different ways to fund your business. First, determine how much funding you’ll need. Then, consider these common ways to raise money:
- Personal savings: this type of business funding is sometimes referred to as “bootstrapping.” You may also consider going to family and close friends for a personal loan (or gift).
- Loans: in order to apply and qualify for a small business loan, you’ll need to gather some paperwork to show the bank or lender. Be sure to include a business plan, financial projections, and an expense sheet, among other things. Typically the first place business owners turn to is their local Small Business Association. Recent history tells us that to get SBA funding you either want to show the SBA and similar lenders a history of successful management skills and business successes, or apply to a Covid emergency type loan or another loan program specific to your demographic – this may be your industry, city/zip code or nationality.
- Investors: consider getting venture capital from investors. This type of capital is usually offered in exchange for some type of control over or role in the company. You have to be prepared to give up some control of your business in this case. Think, Shark Tank.
- Crowdfunding: these types of investors don’t expect any control over your company and rather expect a gift in a form of a product or service in exchange for funds. Crowdfunding has blown up but in some ways, we see this as quite diluted and not a way to bring in 1,000s of dollars unless you truly have a stellar product, team, or history behind you.
Q: How should I pay myself as a business owner?
A: There are many financial benefits of incorporating, and some of the more important ones include reduced payroll tax and the ability to control your timing of income. You often can and should reduce your payroll tax by paying yourself through owner’s distributions. Running payroll, e.g. putting yourself as a W-2 salaried employee is often required (especially in years two and on) and can help you control cash flow, and maximize deductions and their timing.
You should also carefully consider when you pay yourself as well. If you perfectly time bonuses, self-employment income, and distributions to your retirement plan, you could save on taxes.
Q: Can a sole proprietorship have employees?
A: Yes. Like any other small business owner, a sole proprietorship can hire people to work for them and there is no limit to how many employees you hire. You can hire independent contractors or salaried employees. If you choose to bring on a salaried employee, as the owner you’ll have to get an Employer Identification Number (EIN).
Q: What’s the difference between shareholders and a board of directors?
A: A shareholder is someone who owns shares (a part of a company) in a corporation. Shareholders are the same thing as stockholders, which means that they own equity in a corporation. They typically own a portion of the corporation but have little to do with day-to-day operations.
A board of directors represents shareholders. Every public company (C corp) is required to have a board of directors that meets regularly to discuss important company policies and management.
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Photo by Daniel Jensen on Unsplash