The Business Plan is a key element to the success of any business venture. Building a plan forces you methodically to analyze what needs to be done to create a successful business, at start up and in the future.
Some questions that should be answered with a business plan include:
Who are you and what is your experience? What business are you in— what is your product? Is there a market for your product, and how do you know? Who will buy your product? Who is your competition? What can you do that is different or better than the competition? How will you get the word out (marketing)? These are just some of the questions you should be answering when putting together a business plan.
Choosing a business name is important and can be a time consuming project. I recommend you choose a simple name that fits you, but don’t get so hung up on choosing a perfect name that you delay getting investment properties. My first business name was simply PDX Properties, which stood for Paul and Debbie Xavier.
When setting up your legal structure, ensure you use the advice of a professional, such as a CPA and/or attorney. A popular trend is to use Limited Liability Companies (LLC’s) for their simplicity, flexibility, and ease of set up. LLC’s are currently the only legal entity I use for my real estate businesses.
Here are some points to consider when selecting a business organization designation such as LLC or sole-proprietorship. Remember a primary consideration in selecting a business organization is to protect the business owner from liability. Additionally, one must consider the transferability of ownership rights, the ability to continue as a business in the event of one or more of the owners’ deaths or withdrawal, the capital needs of of the business, and tax liabilities.
The following information provides a brief overview of these considerations as they apply to forming a business organization depending on your particular needs. This information is not a substitute for competent legal advice. It is merely to assist prospective entrepreneurs in the earliest stages of business plan development. People contemplating a new business are always strongly urged to consult competent legal, financial, and tax advisors.
Sole Proprietor. Sole proprietorships are the most common and simplest form of business organization. They are formed by people who own all the business’ property and assets. They are 100% responsible for all the control, liabilities, and management of a business. A sole proprietorship, as its name states, has only one owner. The sole proprietorship is merely an extension of its owner: a sole proprietor owns his own business, and no one else owns any part of it.
General Partnership. General partnerships are made up of two or more persons, called general partners, who enter into an agreement to conduct business for a profit. General partners have a fiduciary duty of loyalty and trust to the other partners, and they must subordinate their personal interests to those of the partnership.
Limited Partnership. A limited partnership is a specialized form of general partnership. While it is similar to a general partnership in most aspects, the limited partnership is made up of at least one or more general partners and at least one or more limited partners. The general partners bear 100% of the risk of liability for the debts of the business; the limited partners risk only their capital contributions and nothing more. Limited partners may not take a role in the management of the business. If they do, they could be found to be general partners and therefore assume unlimited liability for business debts as a general partner.
Corporation. Corporations are the form of business organization most often associated with the term “business.” Most large businesses are corporations. Corporations are creations of the state, with methods of creation dictated by state statute. Businesses are generally required to file their articles of incorporation with the State Division of Corporations. Upon approval, the incorporators designate the board of directors and issue stock. Annually the directors are elected by the shareholders and are responsible for establishing corporate policy. They have a fiduciary duty to preserve the corporation. The board is empowered to hire managers to operate the business and conduct its affairs. The shareholders own the corporation. They enjoy limited liability, but they do not participate in the day-to-day management of the business. Corporations can also be broken down further into:
Subchapter C Corporation. The label, “C-Corporation” merely refers to a regular, state-formed corporation. To have a C-Corporation, you must file Articles of Incorporation and pay the required state fees and taxes with the appropriate state agency (usually, the Secretary of State).
A corporation assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at a corporate income tax rate and files its own corporate tax forms each year (IRS Tax Form 1120).
Typically, the Board of Directors, elected by the corporation’s shareholders, control and manage the corporation. Directors generally make policy and major decisions regarding the corporation. Directors do not represent the corporation when dealing with third persons. Officers and employees of the corporation deal with third persons as instructed by the Board of Directors.
Shareholders are the owners of the corporation.
The Board of Directors is responsible for the management and policy decisions of the corporation. However, there are some instances when the shareholders are required to approve the actions of the board (e.g. amendment to the Articles of Incorporation, sale of corporate assets, the merger or dissolution of the corporation).
Corporate officers are elected by the Board of Directors and are responsible for conducting the day-to-day operations of the corporation. Corporate officers usually consist of the following: President, Vice-President, Secretary, and Treasurer.
In most states, one or more persons may form and operate a corporation. Some states require that the number of persons necessary to manage a corporation be at least equal to the number of owners. For example, if there are two shareholders, there must also be a minimum of two directors.
Corporations often offer their employees unique fringe benefits. For example, owner-employees may deduct health insurance premiums paid by the corporation from corporate income. In addition, corporate benefit plans often afford better retirement options and benefits than those offered by non-corporate plans.
To retain the corporate existence and thus the benefits of limited liability and special tax treatment, those who run the corporation must follow corporate rules. Annual meetings must be held, minutes of the meetings must be taken, officers must be appointed, and shares must be issued to shareholders. Most importantly, the corporation should issue stock to its shareholders and keep adequate capital on hand to cover any anticipated business debts.
Where corporate rules and regulations are not observed, shareholders may be held personally liable for corporate debts. If rules and regulations are not followed according to the law, a court or the IRS will hold the shareholders personally liable for corporate debts.
Generally, a corporation is taxed on its own profits. Any profits paid out in the form of dividends are taxed again to the recipient as dividend income at the individual shareholder’s tax rate. However, most small corporations seldom pay dividends. The owner/employees are paid salaries and fringe benefits that the corporation may deduct on its taxes. The result is that only the employee/owners end up paying any income taxes on this business income, and double taxation rarely occurs.
A corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers and directors, or by transfer of its shares from one person to another.
Subchapter S Corporation. The S corporation has an allure to the small business owner because it provides the limited liability of a corporation while at the same time net income is reported on the individual tax return. S corporations must have 75 or fewer shareholders and the shareholders elect the Board of Directors.
Benefits of the S corporation are lower tax rates and no double taxation. In essence, the initial income of a corporation has a lower tax rate than an individual tax rate. S corporations are taxed on income and not distribution. Income distributions are NOT subject to employment taxes. S Corporations file Form 1120S with the IRS. Ownership is easily transferred and the business does not end upon the owner’s death.
S corporations cannot own more than 80% of another corporation and can only issue one class of stock. Health benefits and other personal benefit costs are not fully tax deductible and some home business deductions may be lost. Social Security and Medicare taxes are exempt.
Legal fees for establishment of an S corporation range from $600 to $1,000 and the licensing fees can range from $300 to $900 based upon the city, state, and county requirements. An advantage of the S corporation is that it separates the business from the owner. The court cannot hold your personal assets if the corporation is sued.
Consultants or business owners with minimal public interaction are well suited to utilize the S corporation entity. Benefits include better tax advantages while receiving liability protection.
Limited Liability Company (LLC). An LLC means the owner has limited liability according to what you have invested in the LLC. A limited liability company is a form of business entity that combines the operational flexibility and tax status of a general partnership with the limited liability protection traditionally associated with limited partnerships and corporations. An LLC has far greater operational flexibility than a Subchapter C Corporation, a Subchapter S Corporation, or a Limited Partnership.
As with any new business, start-up capital is usually an issue; therefore, the business plan should be created in a way that will let the new Investor use his or her dollars or pennies as wisely as possible. So, it is perfectly fine to start with a sole proprietorship and convert to an LLC or Corporation when the funds are available. The important thing is to get started!
Create a business plan to set your individual goals. Then set time frames to achieve those goals. If you fail to meet the time frame, it’s okay because at least you will now have clear goals to work toward.