Starting a business requires a lot of financial planning for higher efficiency levels, greater profitability, and for taxation purposes. This may seem like an uphill tax for a business owner who has no prior experience or training on handling financial issues. However, with a few tips one can streamline their business financial planning for a successful future. The following 5 tips can greatly help a limited company such as a limited partnership, a limited liability company, or a corporation to start on the right footing right from inception.
1. Protect Your Personal Assets
A sole proprietorship is owned by a single individual and the business’ liability is synonymous with the owner’s liability. That means in case a legal suit against the business ends in a judgment that is detrimental to the business, the owner’s property can be used to settle any payments to creditors. By making the business a limited company, the owner’s property is separated from the business assets and any judgments against the company will hold the owner liable only up to the extent of his/her investment. Personal property will not be affected.
2. Prepare an Operation Agreement
When launching your limited liability company, it is very important for members to decide on how to invest and how to share profits and losses. Topics normally covered by the operating agreement include number of initial members and how much interest each member has in the business. The members have to agree on how and when they will share profits and losses and in what proportions. The agreement also covers members’ voting and vetoing powers and the procedures necessary for admitting new members into the firm. The agreement will additionally outline procedures for the resignation of existing members and dissolution of the firm. The rules to be followed when organizing and holding meetings also need to be outlined.
3. Have a Tax Plan
There are many taxation advantages including tax relief benefits enjoyed by limited liability companies as opposed to partnerships. Therefore, you have to notify the Internal Revenue Service that your firm is an LLC which should be taxed as a C corporation. This is done by filing an election using the IRS Form 8832. Additionally, as you launch your limited liability company, you need to obtain an Employer Identification Number except if your LLC has only one member and intends to be taxed as a disregarded entity.
4. Adopt a Corporation Structure
When launching your LLC, you should keep in mind that in the future you might want to raise more capital by including new members. Some of these new members may demand corporate stock certificates as evidence of their partial ownership or investment in the business. To save your initial members from future hassles, simply start out by structuring the firm as a corporation and issue stock certificates right from the very beginning.
5. Offer Fringe Benefits to Owner-Employees
When starting out an LLC, in most cases the investors are the same individuals who will be involved in the day to day running of the business. Rather than have a structure that pays out dividends to members, you can use a structure that pays salaries, benefits, and perks to the owner-employees. This not only makes it easier to divide profits commensurate with individual input but also makes taxation sense as paying of dividends is not tax deductable and dividends will mean double taxation of members.
Launching a limited liability company has many advantages. Members pay less taxes, their personal assets are protected against liabilities incurred by the company, and the members themselves form the key staff of the business. Members should launch their LLC from a strong financial background backed up by a solid operation agreement.
Sam Clayton is a tax professional and a registered tax preparer with over 8 years experience. Having represented over a hundred clients with the IRS, he now serves as a consultant for other tax preparers and individual tax payers.