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Deciding on a Business Entity: The 3 Decisive Factors

Categories: Business Formation

Have you got a new or growing company? One of the most vital and enduring choices a business owner will make is their business structure–so you’d better be sure to get it right! The decision will be felt for years to come in every aspect of your business: compensation, taxation, asset protection, and more. If you’ve clocked in more hours picking out which floor-tile is just-right than in giving thought to the operational structure of your business, you may well be doing a disservice to both your company and yourself.

Three decisive factors should inform your decision:

Managing risk.  Did you know that anyone can sue anyone else at any time for any reason? It doesn’t mean that they can win, but they can sue. No matter how well-run your business is, someone somewhere is going to find a reason to sue you. It may not be this year; it may not be this decade, but you can expect to be burdened with a lawsuit or two given our litigious society. If you want to keep your personal assets out of someone else’s pockets, you need to protect yourself from potential business liabilities using a limited-liability company (LLC) or corporate structure.

Paying taxes.  We know you would rather avoid thinking too much about the money you’ll be anteing up each year, but not every business structure operates under the same tax code. Sole proprietorships, partnerships, S-corporations, and most LLCs see their business profits and losses “pass through” to the owner’s personal tax returns–net profits are taxed accordingly. C-corporations and LLCs that elect c-corporation tax-treatment, on the other hand, are defined wholly separate from their owners, who do not report their share of corporate profits on their personal tax returns.

The more complicated tax structure can turn some away from giving corporations the thought they deserve, but there are pluses to weigh against the negatives. For example, many business owners take great interest in the lower corporate tax rate. Moreover, serving as an employee of your own corporation allows to pay self-employment taxes only on the salary you pay yourself–self-employment taxes don’t apply to shareholder distributions. Done right, this can be a boon to both you and your business.

Managing complexity.  A sole proprietorship or partnership will typically require less tedious record-keeping and rule-following because they have no asset protection. Corporations and LLCs demand a more by-the-book approach, or else you lose the asset protection that those structures give you.

To learn more, check out our Business Set Up page and download our Guide to Corporations, LLCs and Partnerships.

If you’re a small or mid-size business owner, call us today at (612) 206-3701 or fill out our contact form to schedule a business consultation session.

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When it comes to business, ignorance isn't bliss; ignorance is risk.

There's a handful of legal topics that business owners should be familiar with, at least on a rudimentary level, to reduce the risk of having something horrible come out of left field.

This book is a legal guide to help you put the most common business legal issues on your radar, with enough information for you to be on the alert for when you may need to get some professional advice.

The intention in arming you with this information is so that you can proceed in business confidently and with fewer legal quagmires.

Do you have a cabin?

The first generation that buys a cabin enjoys it to the fullest and it’s a magical place where happy memories are made and families go for some much needed respite. Unfortunately, without thoughtful planning, the chances of the cabin staying a place of happiness and tranquility into successive generations is very, very slim.

If you haven’t done the planning in advance and made it legally binding, the family members (and their ex-spouses and new spouses) will have to work every detail out for themselves. If they can’t, what is likely to happen is a lawsuit called an action for partition that forces everyone to sell their interest. This lawsuit is expensive, and the costs of litigation will come out of the proceeds of the sale of the cabin, so to add insult to injury to those who wanted to keep the cabin but couldn’t afford to buy the others out, they are footing part of the legal bills in the lawsuit against them. Ouch!

It’s no wonder that family members stop speaking for years after the cabin conflict is “resolved.” You can’t make family relationships perfect, but you can take away much of the fuel for the family conflict fire. That’s what cabin planning does, and it has the nice side effect of giving you peace of mind now.

That’s why Kimberly wrote The Minnesota Cabin Planning Guide and Workbook, and you can get a free electronic copy of her book on our cabin planning website, or you can find it in many county libraries in Minnesota, or you can get it on amazon.com.

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