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What Is The Best Legal Structure For My Business?

New entrepreneurs are often unaware of the many legalities surrounding a new business. Most specifically, the legal structure of your business.

New entrepreneurs are often unaware of the many legalities surrounding a new business. Most specifically, the legal structure of your business. This refers to the type of entity your business is and can play a huge role in deciding what taxes you pay as well as all the legal paperwork you need to fill in.

Each legal structure has its pros and cons, but which one is best for your business? Take a look at each structure below, read all the information, and decide which one is best suited for your business model:

Sole Proprietorship

A sole proprietorship is the most common and simple legal structure for your business. This is where you are the sole owner of your business and are responsible for everything – including your assets and liabilities. This means it is your personal responsibility for all of your business finances, you are in charge of the money you make and must also be in charge of any money you owe. Recent research suggests that over half of businesses follow this legal structure.

The main pro of this structure is that you are in charge of the business, so all the money you make goes to you and you alone. However, the downside is that you’re liable for everything too. So, if someone has an issue with your business, they can sue you personally for it. Also, you get taxed as if your profits are personal income. What does this mean? It means you only pay individual tax and not company tax as well.

Partnership

The second legal structure is a partnership, where your business is owned by more than one person. Within this structure, there are two different types of a partnership; general and limited. With a general partnership, this is where everything is divided equally between the parties involved. You each take on the same responsibilities and liabilities. A limited one is where one person is in charge, and the others make a significant contribution but not as much as the main person.

If your business is structured as a general partnership, then it can fall under the sole proprietorship status too. This means all partners are in control of everything, which is a positive as it means you have more brains to bounce around ideas and more resources too. It also means you might have enough money to avoid applying for startup loans, which also means you avoid debt. If you’re a limited partnership, then you’ll fall under Limited Liability Partnership (LLP) status. This means that those with limited control aren’t as liable as the main controller. This can have its pros as it makes it harder to be personally liable during lawsuits if you have limited control. However, the downside is you don’t get an equal share of the profits.

In general, partnerships are good because of the collaboration involved, but bad because of the fact you have to share your profits between other people, meaning your personal take-home is less than if you owned it alone. Plus, another positive is that it follows the same tax structure as a sole proprietorship; you only pay personal income tax.

Limited Liability Company (LLC)

LLC’s are fast becoming a popular legal structure for businesses. Why? Because they allow you to enjoy the main benefits of a partnership (the collaboration, paying individual tax) without some of the negatives.

Mainly, an LLC consists of partners or shareholders – people that have a stake in your business. They’ve used their money to help fund things, and are partially in control of how things are run along with yourself. The key point is, with an LLC, all partners and shareholders aren’t personally liable for any legal issues your business gets into. This means if you fall into debt or get sued, you aren’t liable unless there’s concrete evidence that you’re responsible for the issue at hand.

An LLC is good as it offers you liability protection while also granting the tax benefits you get with partnerships and sole proprietorships. The only negatives are similar to partnerships, any profits you make need to be shared, and you don’t have full control of your business.

Corporation

Once your business establishes itself and starts to grow, you might want to consider switching its legal structure to that of a corporation. A corporation is a business that’s completely separate from you, the owner. While you have your legal rights, so does your business. You can own stock through your business, buy property through it, even sue people through it. It’s a legal entity created with the sole purpose of conducting business. As such, it also has to pay a separate tax. There are many types of corporations, with C corporations being the most common. These are businesses where the owners pay personal income tax, and the business itself pays a separate business tax.

The major benefit of a corporation is that you are completely protected from personal liability. If anything bad happens to the company, such as a lawsuit or heavy debt, you’re not liable, much like with an LLC. The major downside is that you pay two loads of tax; corporation tax and individual tax.

S Corporation

Finally, you have an S corporation which is similar in structure to a C corporation but with one clear difference. Your business is still a separate legal entity, but the tax situation is different. Instead of paying two types of tax, you only have to pay individual tax on any profits you make.

The catch is that you have to fulfill certain eligibility requirements to be classed as an S corporation. For example, you can’t have over a hundred shareholder, and you must be a domestic company. You also can’t have shareholders who are partners, it must only be individuals.

Each of these legal structures comes with positive and negative features. The main things to consider are how much control you have over your business, what tax laws you must abide by, and how liable you will be if things go wrong.

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Finance

How to double business profits and pay no federal tax

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Increasing profits and paying nothing in federal tax may sound like a pipe dream. Surely it’s impossible, right? Wrong, a company is already leading the way here and has provided proof that this is possible. Indeed, the richest man in the world pays nothing in federal tax. It’s shocking, it’s perplexing and it’s completely true. We’re of course referring to Amazon and the recent news that the business pays $0.

How on earth does this work and what can you learn from this? Let’s start with the definition of ‘Federal Tax’ as there are many different types of taxes.

Federal Tax

Federal Tax is a tax on income to pay for the resources used by the country. Individuals, business, trusts, and other legal structures aka entities incur the marginal tax rate depending on earnings in a financial year, the rate is applied to every dollar you earn.

Individuals are taxed at source and at a minimum of 10% or as much as 39.6% depending on, which income bracket your total income sits.

Businesses have more flexibility and their rate could be somewhere between 21% and 35%. More on Federal Tax here.  However as we’ve alluded to, there are ways to end up paying $0 tax just like Amazon, so here’s how they’ve managed it in 2019.

The Success Of The Company

Amazon’s record is incredibly impressive, regardless of which way you slice it. Between 2017 and 2018 the profits of the business actually doubled from $5.6 billion to $11.2 billion! The company is also currently valued at a total of $1 trillion. So, you would think that the business pays a fair level of tax right? Well, not exactly.

The Tax Break

According to the Institute on Taxation and Economic policy Amazon reported with $129 million for a federal income tax rebate. This equalled a tax rate of -1%. To compare this, the federal corporate income tax rate is 21%.

As such, it seems that part of the reason why Amazon is profitable is because they claim various tax credits and gain tax breaks for stock options from executives.

How Is This Possible?

In 2017, the Tax Cuts and Jobs Act was put forward to encourage more corporate citizenship and corporate tax was reduced from 35% to 21%. Luckily for Amazon and various other companies, it left a variety of tax loopholes in place that could be used to cut down the level of tax paid. Essentially, companies could avoid paying state income and federal taxes on about half of their profits.

Does Amazon Pay No Taxes?

Despite claims to the contrary, Amazon does pay taxes and is not a ‘no tax’ company. Indeed, through 2017, the company paid $412 million in total taxes. This included charges consumer sales taxes where applicable.

That said, it’s true that through 2017 and 2018 the company was searching for new tax breaks. They were able to claim billions through performance-based incentives by carefully selecting where to set up their headquarters.

As such, it is unlikely that Amazon will pay any federal tax this year. At the very least, they will see a massive level of savings. While people ask why Amazon would need to go to such lengths to save money regardless of how successful your business is, higher profits are always worth striving for.

There’s a lesson to be learned here too because Amazon and other companies avoid taxes in a way that is completely legally and fits regulations. They are not breaking the law, they won’t sink their business and they will grow their profits. As such, if you are running a business, you too should be pursuing tax breaks each year and cut down what you owe as much as possible. After all, if Amazon is taking these steps why shouldn’t you?

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Finance

Why Entrepreneurs Often Fail

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Entrepreneur is an interesting word. It conjures up thoughts of bravery and superior business wisdom. It’s a person who sees in something what most of us fail to see.

Take that idea, develop it and in turn found a business on it. When it works, it’s pure genius, and we’re in awe of their aptitude. However most businesses fail so most Entrepreneurs are less skilled than we give them credit for.

Bravery in launching a new business is really just a higher level of risk taking and with good debt it’s more acceptable. Good debt is a loan that used to create a revenue, i.e. it’s an investment used to generate and grow an income. Here’s a more extensive definition of good debt.

So the Entrepreneur or business will increase its borrowings via a line of credit, or even a home loan to invest in its products or people with the objective of earning more revenue.

The risky part of borrowing is the end goal is speculative i.e. its usually a well thought out plan but it’s not actually happened and numbers have to work out, i.e. the increase in revenue due to the loan, far exceeds the costs of the loan and other additional expenses, like more staff or systems.

Entrepreneurs have an appetite for risk and as mentioned it sometimes works out but mostly it doesn’t so it’s important to understand the pros and cons of business loans.

Once the good debt options run out, then the only way to go is bad debt loans and this is when it can all spiral downwards for businesses. Bad debt loans are essentially non income producing so they’re a liability. The loans can not be leveraged to make money. They can be written off against taxes and there is also bad debt recovery which is another subject altogether.

Startups fail for many of the same reasons including:

  • Lack of working capital – affecting operations
  • Liquidity issues with cash flow – struggling to pay staff, suppliers
  • Business growing too quickly – not enough resources to deliver on orders
  • Ego – too big to fail

Often it’s not just one thing either but a combo of challenges that just become too much to handle alone. The smart operators don’t go it alone though they have mentors.

Entrepreneurs Need Mentors Too

Behind every good Entrepreneur is a mentor. Yes this is not the adage you were expecting but it works.

Mentors keep us in check. They’re our sounding boards, listening to our rants and raves. Offering an objective viewpoint and advice on the direction we should take.

Of course no one person can be trusted to do the lot so more than one mentor is recommended. The experience and trusted authority from mentorship is recognised in just about all great leaders. Think of the big names in business today and they’ll say they have amazing mentors.

Facebook’s Mark Zuckerberg had Steve Jobs, and Bill Gate had Warren Buffett.

Maybe this is where some Entrepreneurs go wrong? They either don’t have mentors or they don’t use them enough.

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Finance

Neo or Ethereum – where is your investment safer

crypto currencies

The advent of cryptocurrencies and its stellar rise, despite relative infancy and new technology, have arguably impacted the marketing world significantly. Booming in the previous year, 2017 saw a rush of millions of money poured into the cryptocurrency market. And considering its continuously growing network, there is no sign that 2018 will be any different.

Over the last few years, cryptocurrencies and other blockchain projects were able to gain very impressive returns that helped investors to be ridiculously successful. However, inevitably, many had experienced its dramatic declines as well. But despite the risk, more and more people are looking for the next big thing in the market which has the highest potential to multiply ones’ investment. And while there are hundreds of cryptocurrencies, that although represent opportunities to achieve sustainable growth, are also highly risky; and from which it is quite hard to predict which one gives the best result, this article will focus on the two of the most popular alternate coins (altcoins) of today – Ethereum and NEO.

Ethereum and NEO are both high-profile altcoins with massive community support and which many investors swear by one or the other. However, as “the competition for the coin is expected to become tougher in 2018 as new players enter the domain”, the question of whether which of the two will be left holding the scepter becomes less important – but rather, where will investments be safer.

To attempt to answer this question, let’s take a closer look at the two altcoins.

Ethereum versus NEO: Philosophical Differences

Ethereum, according to its website, is “a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.”

NEO, on the other hand, is defined as a “non-profit community-based blockchain project that utilizes blockchain technology and digital identity to digitize assets, to automate the management of digital assets using smart contracts, and to realize a ‘smart economy’ with a distributed network.”

These respective definitions might sound remarkably similar – because, in many ways, they are. That is, both of them “run on a custom built block-chain that can move value around and represent the ownership of the property.”

Moreover, at first glance, these respective definitions might also imply that the two altcoins share the same objectives as both are aiming to dominate the cryptocurrency market by playing the similar roles of being the blockchain platforms for the new internet (or platforms that offer decentralized functionalities) such as Decentralized Applications (DApps), Initial Coin Offerings (ICO), and smart contracts. However, they aren’t, as there are subtle differences:

Ethereum’s goal is to develop its platform in response to new demands – that is, consolidating its role as the go-to platform for ICO’s. Whilst, NEO’s goal is mostly focused on developing its platform for future demands by realizing a so-called “smart economy” that will feature digitized physical assets which can be sold, traded, and leveraged through smart contracts.

Ethereum versus NEO: Backing and Partnership Differences

Because Ethereum is a certified government-agnostic, it is supported by some of the biggest global corporate names such as Enterprise Ethereum Alliance – making it enjoy popularity tointernational audience and thus, much larger support from the tech community.

All the same with NEO – the Chinese government might have gone far as to ban the ICO’s, but NEO remains to be China-based and Chinese-focused. Despite the country being seemingly unfriendly to the industry, NEO manages to receive backing from national banks and states – which allows it to capitalize on the huge Chinese market. Furthermore, it is also supported by Alibaba and Microsoft.

Ethereum versus NEO: Target Market Differences

There can be no doubt that Ethereum and NEO have the huge potential to become the next Bitcoin. Due to the impressive capabilities of their pluses to outweigh the minuses, both of which are continuously gaining popularity especially in comparison to other cryptocurrencies in the market.

Ethereum, which although has already been adopted by blockchain startups worldwide, is proportionally concentrated in the Western countries. Meanwhile, NEO is largely capitalizing in China.

Looking closely, Ethereum seems to benefit from a certain fallacy of thought that “West is the best” – which is quite true in terms of Western products catering to Western markets. But many fail to understand that Chinese investors are less likely to adopt Western technologies as they (like many East Asians) are far readier to support home-grown technology taking pride in and loyalty to national products.

NEO, however, might be having the advantage of a technologically-driven population that is nearly 1.4 billion people strong; not to mention that Chinese investors make up a very large percentage of the world’s cryptocurrency investors. But one should not fail to consider that the involvement of the Chinese government, which might have made NEO a state-mandated currency, plays a significant role in building a loyal following from Chinese investors.

Ethereum versus NEO: Where is your investment safer?

With the capabilities (i.e., both projects are open source and has massive community support) and differences (i.e., serving different markets and the opposite directions their visions are taking) that these altcoins have, should there really be a question of which among Ethereum and NEO is better, or should you invest in both?

While NEO appears and is turning out to be more investment-worthy – focusing on creating a “smart economy”, it should not be forgotten that Ethereum still holds the position of being the second most popular cryptocurrency in the world with a total market cap of $105 billion as compared to NEO’s $9 billion (as of January 25, 2018).

Thus, given that we are dealing with two very robust technologies, it might be better to conclude that there is certainly space aplenty for both altcoins to coexist.

And as to where your investment will be safer, perhaps the most suitable answer is in the altcoin where you can best tolerate the risk and that you understand well. There are more and more investors getting on board who often have a very limited understanding of the technicalities of the cryptocurrency they support, ending up investing based on brand loyalty and hearsays and even merely along the lines “Ethereum of China” NEO vs Ethereum.

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