If your business is going to be owned by more than one owner, the simplest business form to create and operate is a general partnership. Forming a partnership entails an agreement between two or more prospective partners. Whomever you choose to be a partner in any given business venture lies solely in what skills, attributes, or responsibilities this person will be contributing. A partner can be an individual, a partnership, a limited liability company, a corporation, or a trust.

What is a partnership?

The flexibility of a partnership allows the business to operate in a manner that best suits the business needs at the time the business starts and later when the business has matured. Later, when the business has grown, new partners can be added, yet their management capacity can be limited to prevent the new partners from usurping the original partners. When a partner contributes capital to a partnership, the partner receives an ownership percentage in all assets of the partnership, not just in the property contributed.

All partners are jointly liable for the obligations of the partnership. Joint liability means that each individual partner will equally be held responsible for all of the obligations of the partnership. If there is an instance in which any one partner solely contributes to any betterment of the business, that business partner can collect the other partners’ pro rata share of the debt regardless of whether or not the other partners are financially able to repay their share. If this is the case legal action may be required.

There are basically two types of partnerships:

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Today there is a lot of discussion about vision, mission, and goals.  In fact I see many companies investing loads of time, money and effort in coming up with their “mission statement.”  Usually this is a few inspiring sentences that are placed on plaques to hang on the wall or printed on the back of business cards or put on the company web site.  With few exceptions, this often amounts to a big waste of time! 

The fact is few of these mission statements accomplish what they were intended to do.  That is “motivate employees to perform at a higher level.”  Ironically, however, after a month or so not even the CEO, let alone the employees can even remember one word of the mission statement. 

So does this mean establishing a mission for your company is a useless task? 

Not necessarily.  Yet in order to understand how to make mission planning a valuable tool we must first understand WHAT a “mission” is.  In short, a mission is a course of action that a company decides to pursue.  It is the road they will travel in order to ensure they arrive at their ultimate destination.  It is their plan for achieving their vision.  A mission is not something we say, it is something we do. 

Mission Statement Development

A mission statement describes “how” you will achieve your vision.  It describes the “road” that you will walk.  It outlines your values and is a summary of your plan to accomplish your goals. 

Here are some basic guidelines in writing a mission statement:

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On February 17, 2009 President Barack Obama signed the “American Recovery and Reinvestment Act of 2009” (“ARRA of 2009) into law.  Section 1251 of the bill temporarily reduces the recognition period for “built-in” gains tax (BIG tax) on S Corporations from 10 years to 7 years for the 2009 and 2010 tax years.

Why is this important? 

Historically, if you were a shareholder in an S Corporation that converted from a C Corporation and sold the company within 10 years of the date of conversion, you would be subject to BIG tax.  For 2009 and 2010, that 10 year “recognition period” has been reduced to 7 years.  So, if you sell your S Corporation in 2009 or 2010 and it has been converted from a C Corporation at least 7 years prior, you will avoid the 35% BIG tax.  Companies originally organized as S Corporations have never, and remain, not subject to BIG tax.

A Closer Look

When you sell a C Corporation the proceeds from the sale of the assets are owned by the corporation.  They get taxed once at the corporate level (35%) and then again upon distribution to the shareholders where they are taxed at your personal rate.  This effective “double tax” makes it advantageous for the shareholders of a C Corporation to convert to an S Corporation prior to sale.  In an S Corporation the proceeds from sale are “passed through” directly to the shareholders and taxed ONLY at their individual tax rates.

Since the result of converting a C Corporation to an S Corporation is a reduction in revenue for the IRS, the IRS states that the conversion must occur prior to the recognition period or the proceeds from sale will be taxed on a prorated basis.

Example:

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Choosing an Entity Type Which is Best for You and Your Business.

If you have just made the hardest decision of opting to go into business for yourself or if you have owned your own business for years, having a working knowledge of how your overall tax bill is determined can cost or save you thousands. Making the right decision for your business will be critical to both your short terms success as well as eventually how comfortable your retirement might be. To this end, setting up the right entity from day one is your best bet to ensure you pay no more taxes than are legally necessary. The job of your most trusted adviser, your CPA, is to assist and guide in this process being sure to ask questions and contemplate issues you might not have even known to be a concern. As a business owner or running your business, the options will appear to be daunting but these parameters will do much to “lift the veil’ on whether you want your business to be an S Corporation or an LLC.

Limited Liability Company.
Limited Liability Companies/LLC’s are legal in most, if not all, states where their respective legislatures approved them.  LLC’s allow for some flexibility options that are not allowed in some other entity selections as well as some liability limitations that are not otherwise available for professional service companies, those where professionals, such as physicians, are required to have a professional license in order to practice.

Advantages of being an LLC include:

• Ease of formation. LLC’s do not require a Board of Directors or an election of Officers.
• Anyone or entity can have ownership in an LLC. This allows other corporations or those who are not citizens of the United States to be owners.
• Unlimited number of owners.

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CPA Teaches Your Tax Payment/Filing Responsibilities

Paying Your Taxes/Extensions…The IRS Requires us to Pay as We Go

Since World War II, the IRS has been a pay as you go system. Prior to that time, the IRS simply collected their monies at the end of the year when one’s annual tax return was filed. Many entities by virtue of their tax treatment as flow through entities do not pay any income taxes when the returns are filed but rather the income is communicated to the partners via a K-1 which is a part of the return. The entity’s partners are then responsible for reporting their portion of the earnings on their personal/appropriate returns. Thus there are many entities such as Partnerships, LLC’s, LLP’s, an S Corporations for which no income taxes are due when these returns are filed. 

C Corporations are responsible for paying their taxes as they go and they do not have the ability to pay all of their taxes at year end and still avoid assessed penalties and interest. Thus, it is critical to tax plan several times a year to determine the ultimate amount of year end liability due and to take appropriate measures to plan accordingly. For S Corporations and individuals we suggest that you tax plan at least twice annually. At that time it is also advantageous to review a client’s internal finances and obtain their projections of profits for the rest of the year. By utilizing this information as well as by being aware of their personal return issues, itemizations, exemptions, etc. you are able to get an estimate of what your taxable income and your tax will be.Both the IRS and states require you to pay as you go thus requiring you to pay enough in estimates for the taxes due on the profits/taxable income generated.

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You may finally be in the position to fulfill your life-long dream of owing your own business and feel that buying an existing profitable business offers many advantages to starting from scratch.  That may or may not be true.  An existing profitable business will have customers, employees, established product lines and the existing equipment necessary to run the business.  But buying an existing business is a lot different from buying a new house or car.  There are lots of things you must be aware of or your dream could turn into a nightmare. 

The seller is more than likely represented by a professional business broker.  If you do not have expertise in buying a business, your first step should be to hire professional representation.  If you are going to spend upwards of half a million dollars on a business, it only makes good sense to spend a few thousand dollars on a highly competent professional looking out for your interest. 

The seller will have taken great pains to present the business in the best light. The business can look like it is an ideal acquisition.  The thought of owning your own business can generate strong emotions.  So the second thing you must do is temper your emotions.  As the Godfather said, “It’s just business.”  Do not get emotionally attached to owning any business.  Stay totally objective about the business.  Being emotionally attached to owning any business can color your judgment and allow you to make a poor decision. 

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If the time has come to strike out on your own you must, of course, begin with a plan for the operation of your new business.

Preliminary considerations include where you will operate the business from (your home, rental space, purchasing or building, whether or not you will need to hire employees at the outset or wait until after the business develops, how you will finance the start-up costs and continued operation of the business, and whether or not you will be solo or if you will have a coowner or co-owners.

It is of critical importance that you have sufficient cash or financing available from the outset, since one of the primary reasons for new businesses to fail is undercapitalization. A well prepared business plan to be reviewed with your financing source is essential. Once all of these preliminary considerations have been addressed, a decision must be made as to the form of business entity that your new business entity will adopt. There are several options and choices that must be considered.

• Sole Proprietorship
  Perhaps the most basic form is a sole proprietorship, which is a business that is owned by a single person. The main advantages of a sole proprietorship are that the start-up filing fees are minimal and all of the business income is reported on Schedule C of your own personal income tax return, with no separate income tax return required for the business itself. The main disadvantage is that you will be personally liable for all of the debts of the business.

• Partnership
  Yet another entity choice is a partnership. For purposes of this article, discussion is limited to general partnerships only, since limited partnerships are beyond the scope of this article. Some of the main benefits of a general partnership are lower start-up costs and no double taxation of income at both the partnership level and at the individual partners’ level.

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Atlanta CPA on How LLC’s Can Convert To An S Corporation Saving Owners Big Dollars

LLC’s came in vogue approximately fifteen years ago when the state of Georgia enacted legislation allowing LLC’s (Limited Liability Company’s) to be established. Although the LLC does allow for some greater flexibility and ease of operation it often results in a higher tax obligation that might not have been incurred if the business was an S Corporation.

Tax law treats all the earned income from an LLC as being subject to both FICA & Medicaid taxes whereas an S Corporation has to pay those taxes reflected on W-2’s. For tax purposes, the law allows an S Corporation to legally convert to being an S Corporation as long as all active employee/owners pay themselves a fair and reasonable salary. This number is best determined by the facts, position, and profit of a business and the truest test of this calculation is what a business owner would have to pay someone else to perform their position.

All businesses are unique and therefore all saving opportunities are different. But even the smallest of businesses with the smallest of profits may save approximately $6,000 by converting from an LLC to an S Corporation. Already this year, we completed this process for an LLC saving them $25,274 of FICA/Medicaid taxes.

There are only four rules to qualify for being an S Corporation.  You must:

- Have a December 31st year-end.

- Have less than 100 shareholders.

- Have shareholders who are U.S. citizens or resident aliens.

- Have only one class of stock.

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