- WHAT DO I NEED TO START A BUSINESS?
- WHAT ARE SOME OF THE COMMON TYPES OF BUSINESS ORGANIZATIONS?
- WHAT ARE CORPORATIONS?
- WHAT ARE LIMITED LIABILITY COMPANIES?
- WHAT IS A GENERAL PARTNERSHIP?
- DO I NEED A FICTITIOUS BUSINESS NAME STATEMENT?
- DO I NEED INSURANCE?
- DO I NEED ANY LICENSES OR PERMITS?
- CAN I RUN A BUSINESS OUT OF MY HOUSE?
- WHAT IS ESTATE PLANNING?
- WHAT IS THE ESTATE TAX?
- WHAT IS THE GIFT TAX?
- DO I NEED BUSINESS SUCCESSION PLANNING?
- IS FRANCHISING AN ADVANTAGEOUS BUSINESS MODEL?
- WHAT IS A TRADEMARK?
- WHAT IS A TRADE SECRET?
- WHAT IS A COPYRIGHT?
- WHAT IS EQUITY FINANCING?
- WHAT IS EQUITY COMPENSATION? (from Financing and Securities?
- WHAT ARE TAX FREE REORGANIZATIONS?
- WHAT ARE TAX EXEMPT ORGANIZATIONS?
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WHAT DO I NEED TO START A BUSINESS?
Before beginning a new business, you should have an understanding of the business, a written business plan, a good understanding of the economics of the business, experience in a related business and enough funds to cover your costs until the business becomes profitable. Before starting a business, it is a good idea to speak to an accountant and a lawyer so that you understand the tax and legal issues involved and, if desirable, structure the business to minimize taxes, avoid legal problems and reduce the chances of personal liability. The legal structure of your business is extremely important. State law enables you to create a legal entity (a separate identity from your own person) under which you can transact business, without the risk of exposing your personal assets to any liability that might arise out of your business affairs.
WHAT ARE SOME OF THE COMMON TYPES OF BUSINESS ORGANIZATIONS?
The most common types of business organizations include:
- Sole Proprietorship - you are the only owner of the business.
- Partnership, which can take the form of a regular partnership, a general partnership, limited partnership or limited liability partnership.
- Corporation - the default form of a corporation is a C Corporation (also known as Subchapter C Corporation). Smaller corporations typically file for the S Corporation (Subchapter S) tax election so they are not double taxed.
- Limited Liability Company (LLC) - a hybrid formation that provides personal liability protection similar to a corporation, with the flexibility and tax advantages of a single proprietorship or partnership.
WHAT ARE CORPORATIONS?
Corporations are legal entities which are separate and distinct from their owners. They provide liability protection for their owners and are also usually somewhat less burdensome to operate than limited liability companies. Corporations are subject to varying tax treatment depending on whether they have elected "S" corporation status. S corporations are taxed similarly to partnerships (see - limited liability companies below). Corporations that have not elected "S" status have the disadvantage of double taxation, but have certain other advantages such as unlimited shareholders and liberal fringe benefit opportunities.
WHAT ARE LIMITED LIABILITY COMPANIES?
The limited liability company ("LLC") is a relatively new form of entity that combines the tax advantage of a partnership (single level of tax) with the limited owner liability advantage of a corporation, even if the owner(s) participate in the management of the company. LLC's have the following advantages: limited liability protection, no restriction on the number or nature of members, "pass through" of entity profits and losses to investors (that is, profits and losses are passed on to members without being taxed), flexibility in structure and tax-free removal of assets from the business. LLC's do, however, have some drawbacks: the operating agreement must be carefully drafted and it can be more difficult to make an equity offering than with a corporation.
WHAT IS A GENERAL PARTNERSHIP?
A partnership is any arrangement in which two or more parties (such as a corporation or an individual) conduct business as "partners," whether officially or not. In terms of asset protection, general partnerships can be even worse than sole proprietorships. Anything that one partner does affects all of the partners, because each partner of the general partnership is personally responsible for all obligations of the partnership. Thus, each partner's exposure to potential liability is increased by the number of general partners in the business.
DO I NEED A FICTITIOUS BUSINESS NAME STATEMENT?
If you do business under a name that is not the actual name of the business entity or your own name, you need to comply with fictitious business name rules. It is important for purposes of limited liability to use the exact name of a corporation, including the "Inc." (or "LLC" for a limited liability company), on all correspondence, contracts, stationery, business cards and other documents and with respect to all corporate dealings, unless the corporation has filed a fictitious name certificate with the appropriate authorities.
DO I NEED INSURANCE?
Whether you need insurance depends on your business activities and the amount of liability exposure that you have from the activity. In addition, insurance may be required for employees (such as worker's compensation insurance or unemployment insurance). Some common forms of business insurance include: (1) commercial multi-peril policies (covering a variety of exposures), (2) liability insurance covering premises, activities, and products, (3) business interruption insurance, (4) surety and performance bonds, and (5) malpractice and errors and omissions coverage. In deciding whether to purchase insurance, you should analyze your risk exposure. If you are unable to determine your risk of loss from engaging in business, contact a commercial lines insurance broker.
DO I NEED ANY LICENSES OR PERMITS?
Whether you need a license or permit to conduct your business depends upon the type of business you engage in, the location of your business, and federal, state, city, and local rules and ordinances. Some businesses and professions require a license from the state (for example, barbers, beauticians, doctors, lawyers, day care providers, contractors and building trades persons). Cities and towns also require permits for many business activities (such as construction permits).
CAN I RUN A BUSINESS OUT OF MY HOUSE?
Zoning laws on home-based businesses vary considerably among cities and towns. Compliance may depend on the nature of the business, whether you have any employees or business visitors, your hours of operation, parking and delivery issues, etc. Before getting into trouble, it pays to check out the zoning rules concerning what you can and cannot do in your town before you decide to set up shop. Some communities have begun to impose license fees on home-based businesses to generate money for local coffers. Some zoning ordinances in some strictly residential areas will absolutely prohibit all in-home businesses (if you are lucky, your local town officials may overlook these ordinances, especially if your at-home business operation is hidden from public view and is not disruptive for your neighbors). Other communities permit a home business, but may (1) specify the kinds of work that can be run out of your home (i.e., law, dentistry, music, beauty salon, physical therapy, tutoring), (2) limit the amount of floor space that can be utilized, (3) restrict hours, (4) limit the use of on-street parking, (5) prohibit or limit the number of employees you may hire, (6) ban or require a entrance to your business that is separate from your residence, or (7) ban advertising signs.
WHAT IS ESTATE PLANNING?
Contrary to popular belief, estate planning involves much more than just drawing up a Will. Your plan should also include changing your will periodically to accommodate changes to your family structure (i.e., marriage, divorce, adoption, etc.), changes to your assets (acquiring new assets, selling off existing assets, etc.), changes to how your assets distributed after your death, and changes to probate and other laws pertaining to the distribution of your assets. While, distribution of your assets upon your death is an important part of your estate plan, effectively planning your estate involves much more than that. Other issues to consider in your estate plan include:
- Develop a plan to to minimize estate tax liability and avoid probate as much as possible, as well as preserve and increase the value of your estate so you can pass as much of your wealth as possible to your intended heirs.
- Planning what medical treatment you will receive if you ever become incapacitated to the point that you are unable to communicate your wishes, as well as planning on what medical facility will provide the care and naming the person who will communicate your wishes to physicians and other medical staff.
- Planning on who will handle your financial, personal, business and legal affairs if you ever become incapacitated, as well as how your affairs will be handled.
- Planning on how children and other loved ones will be provided for in the event you are no longer able to provide for them due to your incapacitation or death.
- Drafting and periodically updating your final arrangements document to express your death and burial preferences, as well as setting up a trust fund and/or pre-need plan to pay for them (saving your loved ones from the anguish of having to make these decisions in a bereaved state and being financially burdened with the expenses involved).
- Administration of your estate after your death.
The list can continue for quite some time, which is why we strongly suggest that you retain the services of a reputable estate planning lawyer to help you formulate the best estate plan for your needs and periodically update it to accommodate changes in laws, changes in your family structure, changes in your assets, changes to decisions you've made regarding your health care, or any changes you may want to make in how you want your estate distributed and/or administered.
WHAT IS THE ESTATE TAX?
All property that a person has at the time of his/her death is subject to tax. The estate tax is payable by your estate and it is usually paid before property is distributed to the beneficiaries of the estate. Barring an extension, the estate tax is due within nine (9) months after your death. Everyone's estate is subject to the estate tax; however, there is: (1) an unlimited estate tax marital deduction when property is passed to a surviving spouse, (2) a credit which enables every individual to dispose of a certain indexed dollar amount of property, and (3) an exclusion for disposition of property to a charitable organization. The unlimited marital deduction, charitable deduction and transfer tax credit enables most estates to be distributed without incurring any federal estate tax. In addition, there are many ways in which you can structure your estate - to take advantage of available exclusions, exemptions, credits and deductions - so that the tax bite is reduced. Massachusetts also has an estate tax which reaches smaller estates and must be taken into consideration.
WHAT IS THE GIFT TAX?
A federal tax (but not a Massachusetts tax) is imposed upon all gifts from an individual to others during his/her lifetime. This tax is incurred whenever a gift is made. There are exceptions to the imposition of the federal gift tax, such as: (1) every individual is allowed to make gifts of up to $11,000 (indexed) per donee per year free from gift tax (a husband and wife each has this annual exemption so a married couple can gift up to $22,000 without incurring any tax), (2) gifts to pay tuition to a qualified educational organization or to persons who qualify as a provider of medical care made on behalf of another individual are excluded, (3) an unlimited gift tax marital deduction when property is transferred to a surviving spouse of the donor, and (4) a unified credit which enables every individual to dispose of a certain amount of property by gift during lifetime.
DO I NEED BUSINESS SUCCESSION PLANNING?
As retirement age approaches, most business owners hope to transfer their businesses, whether to a family member or to an outside buyer, in such a way as to provide for retirement and preserve the business as a going concern. Transferring ownership and control to a succeeding generation can be a lengthy and difficult process, balancing the owners' and the successors' needs while keeping in mind the best interests of the business.
Any business owner that wants his or her business to survive past the current generation needs to have a succession plan. Unfortunately, many business owners realize they need succession planning, but hesitate to begin the process. In fact, among the mistakes made in business succession planning, the most common is simply waiting too long to start. The reasons vary, but the results are often the same following the death or retirement of the owner: forced liquidation of the business.
Although the complexity and length of succession plans obviously vary from business to business, most require at least five years to plan and implement in full. Putting the process off, to avoid difficult decisions, can narrow the choices available and lead to serious business or tax consequences. Moreover, the difficulties in family or employee rivalry that cause business owners to procrastinate are merely postponed; if planning is delayed they will inevitably arise and play themselves out without the business owner's input.
The overlapping complexities of business succession planning often requires the skills of several outside professionals such as accountants, bankers, insurance advisors and business consultants, as well as attorneys. Proper planning can minimize or eliminate the various taxes that impact the succession, provide for retirement and preserve the business itself.
WHAT IS A TRADEMARK?
A trademark can be a logo, name, symbol, or device used to differentiate a product or service of one trader (or commercial entity) from that of another-brand identity. Example: McDonalds' golden arches. Trademark protection lasts for 10 years after registration, and is renewable.
WHAT IS A TRADE SECRET?
Trade secrets (covered by state rather than federal laws) include formulas, patterns, device or any compilation of data that gives a company a tangible advantage over its competitors (e.g., Coca Cola's formula for its soft drink).
WHAT IS A COPYRIGHT?
A Copyright is protection granted to authors of original authorship such as literary, dramatic, musical and artistic works, and computer software, as well as performing artists in their performances, producers of phonograms in their recordings, and broadcasters in their radio and television programs. Example: The creators of your favorite music CD, movie, or computer game have a copyright on their work. Copyrights last for the life of an author plus 50 years.
WHAT IS EQUITY FINANCING?
In equity financing, you sell an ownership interest in your business in exchange for capital. The first obstacle to equity financing is finding investors who are willing to buy into your business. However, the amount of equity financing that you undertake may depend more upon your willingness to share management control than upon the investor appeal of the business. By selling equity interests in your business, you sacrifice some of your autonomy and management rights.
WHAT IS EQUITY COMPENSATION? (from Financing and Securities)
Many new companies have difficulty recruiting and retaining talented employees. These companies need to attract high quality employees, but often lack the resources to offer competitive salaries. One way to help level the compensation playing field between start-ups and established companies is with equity compensation. Equity compensation is non-cash compensation that represents an ownership interest in the company. The two most common forms of equity compensation are stock options and restricted stock.
A stock option is a right to purchase stock at a predetermined exercise price. The right to exercise the option generally accrues, or "vests," over time. This vesting creates an incentive for the employee to remain with the company. Option holders are not stockholders and so are not entitled to vote or otherwise exercise any other rights of stockholders. Vesting often accelerates upon the sale of the company, unless the buyer assumes the options. Conversely, if an employee leaves the company, the vesting of stock options ceases, and the employee usually has a limited period of time to exercise the options that were vested at the employment termination date.
WHAT ARE TAX FREE REORGANIZATIONS?
If your business is incorporated and you are selling out to a larger corporation, it may be possible to defer the tax due on the sale by structuring the sale as a corporate reorganization and accepting the purchaser's stock in exchange for your own business's stock or assets. If you comply with the extensive rules for these types of transactions, you will not be taxed on the value of the stock you receive until you sell it. If you receive other property in addition to the stock, however, you will have to recognize taxable gain on this amount.
WHAT ARE TAX EXEMPT ORGANIZATIONS?
The process of forming a tax exempt organization can be complex and confusing. Furthermore, tax exempt status does not necessarily mean charitable status. To qualify for charitable status under the Internal Revenue Code (§ 501(c)(3)), your organization must be organized for one or more of the purposes specifically designated in the Code, namely: charitable; religious; educational; scientific; literary; testing for public safety; fostering national or international amateur sports competition; or the prevention of cruelty to children or animals. Additional tax exemptions exist under separate sections of the IRC for other groups, including: labor unions, chambers of commerce, social and recreational clubs, fraternal societies, civic leagues, credit unions, farmers' coops, mutual insurance companies, and legal service organizations.
If obtained, the recognition of your organization as a 501(c)(3) tax exempt entity by the Internal Revenue Service brings a host of benefits, including:
- Tax free income - Income earned by the organization is tax- free.
- Tax deductible donations - Donors can make charitable contributions and receive tax deductions on their tax returns.
- Employee benefits - Employees will be entitled to various fringe benefits like group life insurance, health insurance, corporate pension plans etc.
- Grants - The organization will be qualified to receive private and public grant money.
- Postage - Lower postage rates on corporate mailings.
