Business Planning

What is Business Planning?

Business Planning ensures that your business goals are met during all phases of your business. From start-up, to yearly maintenance and ending with your succession plan. If you want to take care of business even after you’re gone, whether you want to sell it or keep it in the family, you need to plan what will happen to your estate, and that includes your business. Communication with your family and business partners is the first step,  and making sure you have the proper documents in place, that coordinate with your overall estate plan, is the second.

What is an LLC – Limited Liability Company?

The LLC is a type of hybrid business structure that is designed to provide the limited liability features of a Corporation and the tax efficiencies and operational flexibility of a partnership. A popular choice for sole proprietors who are looking to incorporate simply to protect personal assets or secure additional loans, the LLC is thought to be one of the easiest and least expensive forms of ownership to organize. In many cases, the ongoing maintenance costs associated with protecting your corporate shield are less in an LLC than a Corporation. This is due to the absence in an LLC of many of the corporate formalities that must be undertaken in order for the shareholders to have continued limited liability for the Corporation’s debts. The Limited Liability Company (LLC) is now a recognized business structure in all 50 states including the District of Columbia. LLC’s are gaining popularity with small business owners because they combine the advantages of a corporation with the tax advantages and management flexibility of a partnership.

What are the main advantages of forming an LLC?

Owners of an LLC have limited liability for business debts. For tax purposes, the allocation of profit and loss of an LLC need not be proportional to ownership interests. With an LLC, there is no double taxation threat since the LLC is not a separate taxable entity. You do not need to be a US citizen to own or invest in an LLC. LLC’s allow their owners to enjoy the tax advantages of partnerships and sole proprietorships while having the limited liability protection associated with corporations.

What is a C Corporation?

A “C” Corporation (or simply a Corporation) is considered by law to be a unique entity separate from those that own it. As an individual entity, a corporation can be taxed, sued, and can enter into contractual agreements. Corporations are owned by shareholders of the corporation, who elect a board of directors to oversee the major decisions and policies. The board of directors is usually responsible for appointing the various officers of the Corporation. If at any point, the ownership of the Corporation changes due to either a transfer of a shareholder’s shares or the death of a shareholder, the Corporation does not dissolve.

What are the main advantages of forming a C Corporation?

The major advantage of a “C” Corporation is the limited personal liability that owners have for the debts of the business. If a Corporation is sued and the creditor is successful in obtaining a judgment, a shareholder can lose no more than their investment in the Corporation. Corporations can generally deduct the cost of benefits as a business expense and can split corporate profits among owners and the corporation, paying a lower overall tax rate. There is no limit on the number of stockholders or who may be a stockholder. “C” Corporations are subject to double taxation, both at the corporate level and when distributions are made to the shareholders. If requirements are met, a Corporation can choose “S” Corporation status enabling them to avoid double taxation.

What is an S Corporation?

A subchapter “S” Corporation, also called an “S” Corporation, is formed and subsequently managed in a similar manner as a “C” Corporation. However, an “S” Corporation, by electing a special tax status, can avoid the double taxation normally associated with a “C” Corporation. The subchapter S tax election makes the Corporation a “pass through” entity whereby all earnings and profits of the Corporation flow through the Corporation to the owners and are only taxed at the owners’ level.

What are the main advantages of forming an S Corporation?

Much like with a “C” Corporation, owners of an “S” Corporation have limited personal liability for business debts and can lose no more than they invested. S corporations are “pass through” entities and avoid double taxation. With an “S” Corporation, owners can use corporate losses to offset income from other sources. Owners of an S Corporation can save on employment taxes (Social Security and Medicare taxes) by taking distributions instead of salary.

What are the differences between an LLC and an S Corporation?

LLC’s are quickly becoming a preferred entity among small businesses. The major advantage of LLC’s over Corporations is the added creditor protection associated with an LLC. Typically, an individual’s creditors can seize all non-exempt assets of the debtor including interests held in a business entity. Those creditors looking to seize a person’s interests in an LLC are limited in their remedies. Creditors are limited to seeking a “charging lien,” which does not give creditors ownership rights in the LLC. The creditor only takes the status of an assignee and not an owner. By contrast; creditors can seize an individual’s shares in a Corporation.  There are additional benefits associated with an LLC that aren’t available with a Corporation. An LLC is simpler and faster to form. An LLC may be formed with one step, while an “S” Corporation election can only be made after a “C” Corporation is formed first. An LLC is not required to hold annual meetings or to keep formal minutes, while an “S” Corporation is required to do so.  LLC members can split profits/losses in any way they choose. In an “S” Corporation, shareholders must receive dividends according to the number of shares they own, regardless of the amount of effort put into the business. An LLC can be owned by any combination of individuals.

What if I already own a business?

Business Succession & Exit Planning is an important component of business planning that should not be overlooked. We like to compare leaving your business successfully to winning a car race.  All race plans include careful preparation of the car, driver skill and experience, crew skill and a well-conceived race strategy. Business owners win their ultimate race when they leave their companies on their terms and on their schedules. The process owners use to achieve this victory is known as Exit Planning. In short, Exit Planning is the deliberate, adaptable, and customized process that a business owner uses so that he (or she) can leave his business on his terms and on his schedule. An exit plan can help maximize your financial return when you transfer your business while minimizing your tax liability. Even if retirement is a long way off, understanding the process now can help you run your business in a way that will make it easier to leave when you are ready. If you become disabled or die before retirement, exit planning can help ensure that your business survives and that your family receives its full value.

Why would I need a Buy-Sell Agreement?

The average business owner spends 10 hours per day, six days per week to get their business to the point where it can provide a measure of security for their family. When the business is owned by partners, all those hours of work can go to waste if they fail to establish a plan in the event one of them suffers an untimely disability or death. Only by planning ahead can the survivor be assured of a smooth transition. A Buy-Sell is an agreement between the owners of a business which details what is to occur upon the disability or death of one of the owners. Such agreements can also deal with the situation where one of the owners becomes disabled, retires, divorces, or wishes to sell their interest in the business. Typically, the Buy-Sell Agreement provides that the surviving owner of the business will purchase the deceased or withdrawing owner’s share of the operation. The agreement should set forth the purchase price to be paid or should provide a formula for determining the price. Perhaps most importantly, the agreement must have a mechanism for providing the funds needed to make the purchase.

Click here to view our frequently asked questions videos.