One of the most neglected aspects of small business ownership is Risk Management. And the easiest way to manage risk is through insurance
Boiled down to its simplest terms for a small business; insurance is value paid to protect against the loss of a much greater value.
When a small business is on a tight budget, owners consider “getting by” without insurance because it is often not required. But disasters can happen: natural or man made. Some people are more tolerant of risk than others, but if you decide to accept certain risk, you, as a small business owner should understand that you are doing just that: Accepting Risk!
FOUR important types of insurance to consider are:
Business Property Insurance
Business Disability Insurance
Business Liability Insurance
Errors and Omissions Insurance
Business Property Insurance is the most commonly held insurance and is acquired to protect your company's assets from hazards, theft, etc.
Business Disability Insurance protects both the business owner and the business in case someone vital to the operation of the business becomes incapacitated. It provides a source of income to the business so that the business does not have to be shuttered while the operation is shut down.
Business Liability Insurance is a safeguard against financial disaster in the course of an unfortunate incident for which the business or one of its agents is responsible. Even if you have an LLC or a corporation, you may not be personally insulated from liability – and the business certainly is not.
Errors and Omissions Insurance is most often used to protect board members and other decision makers within a business structure. Poor decisions on the part of board members may not always result in personal liability, but Errors and Omissions Insurance protects you when it does.
All of these types of insurance and more can be found at the The About.Com web site; “Insurance Needs for Small Business.”
The health of your small business will depend upon a good risk management plan, and insurance should be an important part of that plan.
Tuesday, April 28, 2009
Wednesday, April 22, 2009
WRECKING YOUR SMALL BUSINESS: TRAGIC COMEDY IN FIVE ACTS
So, you have a business and you have created either a corporation or a limited liability company to be the business entity to conduct that business; and you think that you are protected.
ACT ONE: You open the doors to your new business Business Interests Group and yourr very first client or customer walks through the door [or contacts you online] to buy your product or hire your services. “How shall I make out the check?” the client asks. “Make it out to me, ‘John Q Businessman,” you reply happily.
WRONG!
You have just made one of the many common errors committed by the small business owner. You go through all of the trouble to create a business entity to protect you from liability and then you prevent it from protecting you. It is just as if you have put on shin guards to go out and play in traffic!
It is fine to be proud of your individual accomplishment in starting and running a good business, but you can not let your ego get in the way of having your business entity protect you. Your business entity is a separate legal person. That is why you created it – so that this separate legal person can absorb the liability and you do not have to.
If you have your personal name on the business checks and invoices the customer or client may reasonably have the right to believe that he is doing business with you and not your business entity. The exact name of the corporation or LLC should be on all of the businesses' contracts, checks, invoices and business cards that you give to your employees.
ACT TWO: Your business is doing well and you want to move to a larger office and obtain a higher quality web site. You find the right site and a web site provider that is compatible with your business. You prepare the company check to make the deposit and first payment and you sign the contract in your own name.
WRONG!
The business should own the lease and the web site, not you. By signing the contracts in your own name, you have just jumped out in traffic again thinking that your shin pads will protect you. When you created your business entity, you most likely gave yourself a position (such as President, Secretary, Treasurer or Chairman of the Board). When you sign contracts, YOU SHOULD SIGN ON BEHALF OF THE BUSINESS ENTITY AND IN THE CAPACITY OF YOUR POSITION. For example the contract could be signed: “Business Interests Group by: John Q. Business, President.” This way, you are not incurring any personal liability by simply signing a document, and it is clear that it is Business Interests Group that is entering into the contract.
ACT THREE: Several months after you have expanded your business, you fear that you have not chosen a business name wisely. Your regular customers call your business by its initials “BIG” which has become a catchy nickname. The word spreads about “BIG” and business grows. You go with the flow and hang a new sign over your door and change the name of the web site to “BIG” and you simply start doing business as “BIG.”
WRONG!
Unless you register your new name with the appropriate authorities, the resulting confusion could lead to liability for you. Just because you say that Business Interests Group is “BIG” that does not mean that “BIG” exists as a legal entity. And worse still, what if the name “BIG” is owned by someone else? Registering the fictitious name will ensure that is not the case, but a name check will be required before it will be approved. Another possible mistake in using a fictitious name is in registering the name with you being the owner of that name and not the business entity. If you own the fictitious name “BIG” your business entity does not own it, it can fairly be assumed that it is you who is conducting the business and not your business entity.
ACT FOUR: You have been in business for over a year and you are approached by a local business woman about entering into a joint venture. The business is owned by more individuals than your self (these could be stockholders and/or board members in a corporation or members in a LLC) but you have to act fast in order to take advantage of this fleeting opportunity. You decide to do the deal and enter into a contract with your new joint venture partner without getting the permission of the other members, board members or stockholders as required in the business entity’s By-Laws. But since you are the President (i.e. “Top Dog”) and the person who runs the business anyway, you figure that this is not a problem.
WRONG!
When the deal with the joint venture partner goes sour and both your companies are sued, your members, board members or stockholders whose approval was required for the deal my refuse to let their investment be jeopardized and require you to absorb the liability personally. And if you entering into the joint venture was unauthorized – GUESS WHAT? – You probably are personally liable. You must follow the rules of the business entity as they are set out in the formative documents and By-Laws if you expect to be protected.
ACT FIVE: The office building down the street is up for foreclosure sale and you can snatch it up at a great price. You take the Business Interests Group’s books down to the bank and apply for a loan under Business Interests Group’s name. The bank likes the deal but Business Interests Group is not credit worthy enough on its own. Your banker tells you that they will do the deal if you give them your Personal Guarantee, and in fact he assures you that the loan will go through if you give your guarantee. It feels good to be so well thought of by your banker and beaming with pride you sign the guarantee.
WRONG!
You’ve done it again! What is the use of having a separate business entity if you are still put your personal assets on the line? In all fairness it might be such a great deal that sticking your neck out may be worth it. BUT YOU MUST UNDERSTAND THAT WHEN YOU SIGN A PERSONAL GUARANTEE, IT IS JUST THAT, A GUARANTEE THAT YOU PERSONAL ASSETS WILL BACK UP THE DEAL. If you must give your guarantee for the business entity, you should look into receiving some benefit in return, and this could be discussed with the members, board members or stock holders of the business entity.
This was a short dramatization in Five Acts to illustrate how your actions can defeat the very purpose of doing business using a corporation or LLC. The Ezine Articles web site has a host of articles on various topics relative to using corporations and LLCs with which to operate your small business. Perhaps you might like to take a look at some of them.
ACT ONE: You open the doors to your new business Business Interests Group and yourr very first client or customer walks through the door [or contacts you online] to buy your product or hire your services. “How shall I make out the check?” the client asks. “Make it out to me, ‘John Q Businessman,” you reply happily.
WRONG!
You have just made one of the many common errors committed by the small business owner. You go through all of the trouble to create a business entity to protect you from liability and then you prevent it from protecting you. It is just as if you have put on shin guards to go out and play in traffic!
It is fine to be proud of your individual accomplishment in starting and running a good business, but you can not let your ego get in the way of having your business entity protect you. Your business entity is a separate legal person. That is why you created it – so that this separate legal person can absorb the liability and you do not have to.
If you have your personal name on the business checks and invoices the customer or client may reasonably have the right to believe that he is doing business with you and not your business entity. The exact name of the corporation or LLC should be on all of the businesses' contracts, checks, invoices and business cards that you give to your employees.
ACT TWO: Your business is doing well and you want to move to a larger office and obtain a higher quality web site. You find the right site and a web site provider that is compatible with your business. You prepare the company check to make the deposit and first payment and you sign the contract in your own name.
WRONG!
The business should own the lease and the web site, not you. By signing the contracts in your own name, you have just jumped out in traffic again thinking that your shin pads will protect you. When you created your business entity, you most likely gave yourself a position (such as President, Secretary, Treasurer or Chairman of the Board). When you sign contracts, YOU SHOULD SIGN ON BEHALF OF THE BUSINESS ENTITY AND IN THE CAPACITY OF YOUR POSITION. For example the contract could be signed: “Business Interests Group by: John Q. Business, President.” This way, you are not incurring any personal liability by simply signing a document, and it is clear that it is Business Interests Group that is entering into the contract.
ACT THREE: Several months after you have expanded your business, you fear that you have not chosen a business name wisely. Your regular customers call your business by its initials “BIG” which has become a catchy nickname. The word spreads about “BIG” and business grows. You go with the flow and hang a new sign over your door and change the name of the web site to “BIG” and you simply start doing business as “BIG.”
WRONG!
Unless you register your new name with the appropriate authorities, the resulting confusion could lead to liability for you. Just because you say that Business Interests Group is “BIG” that does not mean that “BIG” exists as a legal entity. And worse still, what if the name “BIG” is owned by someone else? Registering the fictitious name will ensure that is not the case, but a name check will be required before it will be approved. Another possible mistake in using a fictitious name is in registering the name with you being the owner of that name and not the business entity. If you own the fictitious name “BIG” your business entity does not own it, it can fairly be assumed that it is you who is conducting the business and not your business entity.
ACT FOUR: You have been in business for over a year and you are approached by a local business woman about entering into a joint venture. The business is owned by more individuals than your self (these could be stockholders and/or board members in a corporation or members in a LLC) but you have to act fast in order to take advantage of this fleeting opportunity. You decide to do the deal and enter into a contract with your new joint venture partner without getting the permission of the other members, board members or stockholders as required in the business entity’s By-Laws. But since you are the President (i.e. “Top Dog”) and the person who runs the business anyway, you figure that this is not a problem.
WRONG!
When the deal with the joint venture partner goes sour and both your companies are sued, your members, board members or stockholders whose approval was required for the deal my refuse to let their investment be jeopardized and require you to absorb the liability personally. And if you entering into the joint venture was unauthorized – GUESS WHAT? – You probably are personally liable. You must follow the rules of the business entity as they are set out in the formative documents and By-Laws if you expect to be protected.
ACT FIVE: The office building down the street is up for foreclosure sale and you can snatch it up at a great price. You take the Business Interests Group’s books down to the bank and apply for a loan under Business Interests Group’s name. The bank likes the deal but Business Interests Group is not credit worthy enough on its own. Your banker tells you that they will do the deal if you give them your Personal Guarantee, and in fact he assures you that the loan will go through if you give your guarantee. It feels good to be so well thought of by your banker and beaming with pride you sign the guarantee.
WRONG!
You’ve done it again! What is the use of having a separate business entity if you are still put your personal assets on the line? In all fairness it might be such a great deal that sticking your neck out may be worth it. BUT YOU MUST UNDERSTAND THAT WHEN YOU SIGN A PERSONAL GUARANTEE, IT IS JUST THAT, A GUARANTEE THAT YOU PERSONAL ASSETS WILL BACK UP THE DEAL. If you must give your guarantee for the business entity, you should look into receiving some benefit in return, and this could be discussed with the members, board members or stock holders of the business entity.
This was a short dramatization in Five Acts to illustrate how your actions can defeat the very purpose of doing business using a corporation or LLC. The Ezine Articles web site has a host of articles on various topics relative to using corporations and LLCs with which to operate your small business. Perhaps you might like to take a look at some of them.
Thursday, April 16, 2009
Consider A Limited Liability Company For Your Small Business
A Limited Liability Company is often considered to be a type of business organization that has both the insulation from liability afforded by a corporation combined with the tax pass-through advantages of a partnership.
The LLC permits a business to operate more like a regular partnership. Income is distributed to partners who report it on their individual income tax returns, while at the same time those individuals are protected from personal liability for the business's debts, in pretty much the same way as a corporation does. In general, unless the business owner establishes a separate corporation, the owner and partners (if any) assume complete liability for all debts of the business.
The LLC may seem to afford the same advantages and disadvantages as the subchapter S corporations; but there are some subtle differences. A subchapter S corporation can issue only one class of the company stock; but an LLC can offer several different classes of stock with different rights. And while S corporations are limited to a maximum of 75 individual shareholders (and all of these shareholders must be U.S. residents) an LLC can have an unlimited number of individuals, corporations, and partnerships who are participants in the LLC.
Another benefit that the LLC has over the limited partnership is that it provides significantly greater tax advantages. In a limited partnership a partner’s are considered passive losses and cannot be used as tax deductions to offset active income unless the partner is active. And active partners become liable for the firm's debt. And even though the owners of an LLC do not assume liability for the business' debt, any losses the LLC incurs can be used by the owners as tax deductions against active income.
It is important to note, however, that there is a "transferability restriction test" with LLCs and their ownership cannot be transferred without restrictions. But while this restriction may be a fatal flaw for large business organizations that need to transfer stock to raise money (such as on a stock exchange) it should not be a major problem for small businesses that seldom transfer ownership interests.
Entrepreneur.com has a very informative article on LLCs.
--------------------------------------------
Here is what the IRS says about LLCs:
Limited Liability Company (LLC)
You can read more at the IRS’s site.
------------------------------------------------------------------
Here is an excerpt from Find Law on how to form an LLC:
To read the entire Find Law article on how to start an LLC, you can click here.
This article is to designed to point you towards resources that can help you consider whether you would like to form an LLC and if it would meet your needs. This article does not contain any legal advice and should not be construed as such. In order to get legal advice, the reader should consult with an attorney.
The LLC permits a business to operate more like a regular partnership. Income is distributed to partners who report it on their individual income tax returns, while at the same time those individuals are protected from personal liability for the business's debts, in pretty much the same way as a corporation does. In general, unless the business owner establishes a separate corporation, the owner and partners (if any) assume complete liability for all debts of the business.
The LLC may seem to afford the same advantages and disadvantages as the subchapter S corporations; but there are some subtle differences. A subchapter S corporation can issue only one class of the company stock; but an LLC can offer several different classes of stock with different rights. And while S corporations are limited to a maximum of 75 individual shareholders (and all of these shareholders must be U.S. residents) an LLC can have an unlimited number of individuals, corporations, and partnerships who are participants in the LLC.
Another benefit that the LLC has over the limited partnership is that it provides significantly greater tax advantages. In a limited partnership a partner’s are considered passive losses and cannot be used as tax deductions to offset active income unless the partner is active. And active partners become liable for the firm's debt. And even though the owners of an LLC do not assume liability for the business' debt, any losses the LLC incurs can be used by the owners as tax deductions against active income.
It is important to note, however, that there is a "transferability restriction test" with LLCs and their ownership cannot be transferred without restrictions. But while this restriction may be a fatal flaw for large business organizations that need to transfer stock to raise money (such as on a stock exchange) it should not be a major problem for small businesses that seldom transfer ownership interests.
Entrepreneur.com has a very informative article on LLCs.
--------------------------------------------
Here is what the IRS says about LLCs:
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
“Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).
You can read more at the IRS’s site.
------------------------------------------------------------------
Here is an excerpt from Find Law on how to form an LLC:
How to Form an LLC
Limited liability companies (LLCs) are easier to create than corporations -- and forming one may be the best thing you can do for your business.
Forming an LLC (limited liability company) is not as hard as most people think. Here are the steps you need to take to make your LLC a legal reality.
1. Choose an available business name that complies with your state's LLC rules.
2. File formal paperwork, usually called articles of organization, and pay the filing fee (ranging from about $100 to $800, depending on your state's rules).
3. Create an LLC operating agreement, which sets out the rights and responsibilities of the LLC members.
4. Publish a notice of your intent to form an LLC (required in only a few states).
5. Obtain licenses and permits that may be required for your business.
To read the entire Find Law article on how to start an LLC, you can click here.
This article is to designed to point you towards resources that can help you consider whether you would like to form an LLC and if it would meet your needs. This article does not contain any legal advice and should not be construed as such. In order to get legal advice, the reader should consult with an attorney.
Tuesday, April 7, 2009
Starting a Business with a Subchapter S Corporations
Entrepreneur at Entrepreneur,com defines a Subchapter S Corporation in the following way:
“Definition: A special form of corporation that allows the protection of limited liability but direct flow-through of profits and losses.”
The significance of this for the small business person is that it is possible to save on the costs of being taxed twice by the IRS on revenues that your business generates.
Here is what the IRS web site has to say about Subchapter S Corporations:
S Corporations
“An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.”
If you create an S corporation you may nevertheless be liable for taxes such as: Income Tax, Estimated tax, Employment taxes and Excise Taxes. The: IRS web site can help you navigate the forms that you will need to file these taxes.
I do not believe in re-creating the wheel, and there are plenty of informative articles on the web about Subchapter S Corporations. One very good article is “Subchapter S: Some Myths, Realities and Practical Considerations”, which is one of a series of articles entitled: “Starting Up: Practical Advice for Entrepreneurs” by Joe Hadzima. This particular article is reprinted from the Boston Business Journal and posted by MIT at its website.
Entrepreneur also gives a very good run-down of some of the benefits and drawbacks of doing business as a Subchapter S Corporation .
And finally, for a brief overview of Subchapter S Corporations in very clear layman’s terms, you may wish to take a look at Wikipedia’s treatment of the issue.
We will return to the issue of Subchapter S Corporations and compare them to the other possible forms of business structures for the small business. But for now, this should provide plenty of reading for the Entrepreneur who is consider starting a small business and structuring it as a Subchapter S Corporation.
“Definition: A special form of corporation that allows the protection of limited liability but direct flow-through of profits and losses.”
The significance of this for the small business person is that it is possible to save on the costs of being taxed twice by the IRS on revenues that your business generates.
Here is what the IRS web site has to say about Subchapter S Corporations:
S Corporations
“An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.”
If you create an S corporation you may nevertheless be liable for taxes such as: Income Tax, Estimated tax, Employment taxes and Excise Taxes. The: IRS web site can help you navigate the forms that you will need to file these taxes.
I do not believe in re-creating the wheel, and there are plenty of informative articles on the web about Subchapter S Corporations. One very good article is “Subchapter S: Some Myths, Realities and Practical Considerations”, which is one of a series of articles entitled: “Starting Up: Practical Advice for Entrepreneurs” by Joe Hadzima. This particular article is reprinted from the Boston Business Journal and posted by MIT at its website.
Entrepreneur also gives a very good run-down of some of the benefits and drawbacks of doing business as a Subchapter S Corporation .
And finally, for a brief overview of Subchapter S Corporations in very clear layman’s terms, you may wish to take a look at Wikipedia’s treatment of the issue.
We will return to the issue of Subchapter S Corporations and compare them to the other possible forms of business structures for the small business. But for now, this should provide plenty of reading for the Entrepreneur who is consider starting a small business and structuring it as a Subchapter S Corporation.
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