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:
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.
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.
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.
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.
Young Money: How To Fund A Startup
Have you got a great idea for a business and now you want to make it happen? You’re not alone. While every business with the idea, commercialising it is a whole new site of skills. Getting a startup business up and running is a challenge for anyone who has not done it before.
Entrepreneurs don’t usually have the ideas, i.e. they’re not the creative talent. They’re the people, the ideas creators turn to, when they want to see how far they can take the idea and turn it into a viable business.
The start up phase of any business involves a lot of working hard, but not exclusively, it also requires investment. Seed money can come from various sources. Without the money, to get started and provide ongoing investment as the business shows promise, your venture may take too long to mature and a competitor takes your place in the eye of the consumer. So where can the investment come from?
There are a lot of different funding options available for small businesses, and they all offer their benefits. You can find some examples of the most popular methods below, along with some additional information to help you choose which route might be best for you.
You will need to invest in yourself, i.e. put some of your own money in. If you have not got savings, consider other options, like your home loan. This is a hugely popular option for start ups that fail to get funding from other sources. Caveat Emptor: Always seek professional advice from your accountant, lawyer etc before taking on debt.
So if you have money saved up or can get a loan from a bank, funding your business will be a fast process. As aforementioned, there will be a personal risk here, but you won’t have to prove to anyone that your business will work, making it great for those who can’t get further than a concept without some capital.
Some banks and governments will offer loans to new businesses. In most cases, you will have to have existing cash flow to make this work, limiting the successful startups will have with it.
If you can convince an investor with the money to back your idea, you won’t have to look at other types of funding for business, as you will have both money and support. This isn’t always easy to find, and you will have to prove that your idea is worth their time, making it hard for those with nothing but a concept.
Personal Risk vs. Sacrificing Freedom
The choice you make when you’re choosing how your company will be funded largely rests on what is more important to you.
If you are willing to take on personal risk, using your own money can be a great way to go, as it will give you all the freedom you need to build the business you’ve been dreaming about.
For those who would rather keep their money safe, making a couple of compromises along the way can be a small price to pay for an investor or venture capital. This is a very personal decision to make.
Why Isn’t The Bank An Option?
A lot of startups find disappointment when they approach a bank for a loan to get themselves off the ground.
Unfortunately, history has shown that being too willing to offer new businesses money can result in heavy losses, and banks have learned for their mistakes. Before you can convince a company like this to support your venture, you will need to prove that it can make enough to pay it back, and most startups just don’t have the income.
Choosing the funding option which you use for your startup has always been a challenge. It’s becoming more common to find businesses which cost nearly nothing to get started, opening the doors to another idea for you to consider.
Best Cryptocurrency to Buy – Which Is Best?
A lot of people might say that cryptocurrency’s big moment has ended. After the sharp rise and precipitous fall of bitcoin, many strait laced investors soured on the idea of crypto investment. Crypto’s 15 minutes of fame were over, the thinking was, and it was time to move your money back to safer, and more standard commodities.
This, however, is just not true. Cryptocurrency continues to be a sound investment, if you know the best cryptocurrency to invest in. We’ve compiled a list of four great picks below.
Ethereum is sometimes thought of as bitcoin’s chief rival, which perhaps makes it the second-most famous cryptocurrency. Ethereum is also commonly thought of as an expansion of blockchain technology beyond bitcoin. It is traded as a cryptocurrency, but it also has value as a decentralized computing platform.
Ethereum includes a programming language that runs on blockchain. So, it is used by developers to create apps, including health and security infrastructure, music licensing services, and even anonymous browsers. Ownership of an Ethereum token is recorded on the shared blockchain ledger, as it would be on any cryptocurrency.
However, Ethereum expands this practice to record the ownership of copyrights, music, documents, financial instruments: anything imaginable. By purchasing Ethereum, you are investing in this network, rather than the security as such. For this reason, Ethereum is an excellent investment and one that the savvy investor should be scoping out.
For fame and notoriety among the cryptocurrencies, none can match bitcoin, the original cryptocurrency in many people’s minds. Now more than a decade old (the mysterious Satoshi Nakamoto published the bitcoin white paper in 2008), bitcoin has had its share of ups and downs.
For the savvy investor, though, bitcoin can still be a sound investment. After the massive — and massively famous — December 2017 peak, the price of bitcoin has held steady between $3,000 and $6,000 per coin. As bitcoin matures as a security, it is looking more and more like a place to park your money, rather than the white-hot investment it was two years ago. This is not a downside, because investors need (and will take) both options.
It started as a joke — a play on the classic “doge” meme. But since its inception in 2013, Dogecoin has grown to a market cap of over $312 million dollars in April 2019, with values soaring as high as $2 billion in January of 2018. Dogecoin’s value fluctuations will be familiar to anybody who has traded in penny stocks. It maintains a steady mean value, punctuated by regular spikes in its price.
The trick, as it were, is to buy it just after a spike in its price, and to sell it during the next spike. While Dogecoins are not a strong long-term investment, they can be a decent swing investment if you have the time and energy to monitor them. The origins may be silly, but the money is very real.
Litecoin is a cryptocurrency specifically developed for zero-cost payments. Litecoin was developed to have a faster transaction confirmation than Bitcoin. This emphasis on fast, secure transactions has made Litecoin one of the most popular coins with businesses interested in security.
For this reason, the value of a single Litecoin has risen from $30 to $78 in the past six months, well below the mean value. This is the perfect opportunity for an investor to swoop in. As security becomes increasingly important to businesses across the board, Litecoin begins to look like a better opportunity than ever.
How to double business profits and pay no federal tax
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 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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