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Presentation 11.01
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 A company overview needs to detail what the business is, which
marketplace needs it is aiming to satisfy and how the products and
services meet consumer needs. In addition, the report should
include which consumers the business serves and what its
competitive advantages are.
A good company description should include:
 What the nature of the business is and which marketplace needs it
aims to fulfill.
 It should detail what the products or services are, and how they can
satisfy consumer needs.
 The description should include which consumers or businesses it
aims to serve.
 It should finish with a description that details the business'
competitive advantages. This could mean delivering goods and
services at a lower cost, unique aspects of the services offered or
its efficiency in delivering products.
A good business description is usually concise. As well as detailing
what the business does, it gives an overview of its future outlook.
When making observations, base them on reliable data. This is
especially important when writing a business plan that seeks
funding, as it lets the investor know that the business' owners have
researched the market. Descriptions should also include the
business' legal status, such as whether it is a partnership or a sole
proprietary operation. It is essential to make the business' unique
selling point and profitability clear.
  ideas, products, and company all line-up

start with a longer (1/2 page max.) “elevator pitch.” It grabs the reader’s interest
while going over all the important highlights you just touched on with the
summary. You can use more adjectives than you could in the summary, so make
your passion and your idea shine through.

Once that initial pitch is done, you can go into the legal description of the
company. You need to include the corporation status, legal entity, and anything
else relating to your business structure. This is necessary for most readers, so
you want to make it obvious and clear. You’ll also want to include company
locations (and don’t be afraid to mention that you are still “virtual,” if that’s the
case), and a brief history of the company. The history should include founding
dates, filing dates, investment details, ownership, and things that matter to
anyone looking over the businesses.

Another topic for this section is a more detailed version of the management team.
This topic will also get its own section later in the plan, but for now, it helps to
include the highlights of the entire team. Instead of giving detailed resumes here
(that goes in the other section), include enough experience to boast about high
points specifically related to creating and expanding this company.

If you’re not including a “Products” section, then you should include your products
in this section. It would contain the same information, but in a slightly less
detailed format. You should include enough of the problems, features, and
intellectual property for all of your products.

And finally, you must include your short term and long term objectives for the
company. Instead of just a quick “Exit Strategy” statement, include some details
about your overall strategy and a few major tactics that you’ll use. Make the
objectives seem real and possible.

The company overview in your business

plan will include the following sections:
Company Overview (or Company Summary): This is where you’ll briefly
sum everything up.

Company History: Provide the back story, including date of founding, and
who was involved.
Management Team: Details about who runs the company, and other key
roles.

Legal Structure and Ownership: How you’ve decided to structure your

company, and who owns what percentage of it.

Locations and Facilities: Details on your work spaces or plans to acquire

them.

Mission Statement: A concise statement on the guiding principles of your

company.

Now that we’ve set the groundwork on what should generally be included
in this chapter of a business plan, let’s break it out section by section for
more detailed information:

Company overview
This is the meet and greet section of your business plan. If you were to
eloquently write down your elevator pitch(source of funding), you could
put it in this section. Keep this brief, as you’re going to be expanding on
what you say here in the next few sections.

Company history
This is the “Once upon a time…” of your business plan. The company
history section will start out with when your business was founded and
who was involved, and will go into a little of the backstory.

This section is going to vary depending on who this business plan is being
presented to and what stage your company is in. Is this an internal plan?
Historical data may not be essential. Is this a plan to seek funding? In that
case, investors will want to know your backstory, and this section will
allow you to provide some context for your business plan. Include how
the company started, how it grew and changes made along the way. What
led you to this point?

If you are an existing business seeking funding for expansion or a new

project, the company history section is going to be pretty significant.
You’ll want to make it clear that you have a strong track record of
successful projects, weathering the tough times, and making good
business decisions. Who did you decide to partner with? Have you
launched new products over time? Made improvements on facilities or
services? Streamlined operations?

If this is a business plan for a start up, you won’t have a company history
per se, but you could use the company history section to give a concise
description of how the founder or founders decided to start this venture.
What was the “light bulb” moment? Who was involved?

Management team
The management team section of your business plan is your opportunity
to paint a picture of your team and showcase their finest attributes. Again,
for internal use this may not be applicable, though you could use it to
highlight new employees being brought in or existing employees that are
taking on some new leadership responsibilities.

If you’re a startup or looking to expand, there may be team members you

know you’re lacking. In that case, make mention of what those roles are,
and what your plans are to fill those holes. Include which people might
currently be taking on multiple responsibilities or sharing duties.

If you plan to present your plan to a bank or other potential investors, this
is critical data. Who are the leaders in your company? What qualifies
them for their positions and inspires confidence? Be sure to include details
about yourself, usually at the beginning. Work experience, past successes,
MBAs, and other degrees can be referenced for each person. You want to
showcase everyone in their best light, remembering that investors invest
in people first and ideas second.
Legal structure and ownership
Related to the management team, you may want to include a separate
section outlining the legal structure and ownership of your organization.

The legal structure of your business is important data for any funding
source to have. Are you an LLC? A C-corp? An S-corp? A sole
proprietor? In a partnership? This will also affect how you file your taxes.

The ownership structure of your business is going to be important data to

include. Who owns what percentage of your business? Banks and
investors will want this information to be clearly spelled out.

Locations and facilities

Use this section to describe where you’re going to do business. Are you
going to be purchasing a building for manufacturing? A storefront? Do
you already have a great space?

Explain the circumstances of your use of any space mentioned in this

section. Include whether you own or lease, and what the pertinent terms of
that lease are if you have one. Make it clear what the long-term plan is for
any space that you have, or what your needs will be for a future facility. If
you have a home office, include that here as well.

See Also: How to Choose a Business Location

Mission statement
Be as succinct as possible when crafting your mission statement. What
idea can you distill into one or two sentences that conveys the primary
mission of your company? This might be something you want to create
with your management team if you have one, so it conveys a shared long-
term vision. Looking at some sample mission statements from our sample
plan library can be a helpful start as you consider how to word your own.
See Also: How to Write a Mission Statement (Video) »

Further reading
For more information on the chapters to include in your business plan, and
how to use a business plan to secure funding, here are some articles you’ll
find helpful:

 The Key Elements of the Financial Plan

 How to Write a Business Plan

INTRODUCTORY PARAGRAPH (suggestion)

How to Write a Mission Statement in 5 Easy Steps

Your company’s mission statement is your opportunity to define the
company’s goals, ethics, culture, and norms for decision-making. The
best mission statements define a company’s goals in at least three
dimensions: what the company does for its customers, what it does for
its employees, and what it does for its owners. Some of the best mission
statements also extend themselves to include fourth and fifth
dimensions: what the company does for its community, and for the
world.
A well-developed mission statement is a great tool for understanding,
developing, and communicating fundamental business objectives, and
should be expressed in just a paragraph or two. If you read it out loud, it
should take about 30 seconds. And it should answer questions people have
about your business, like:

 Who is your company?

 What do you do? What do you stand for? And why do you do it?
 Do you want to make a profit, or is it enough to just make a living?
 What markets are you serving, and what benefits do you offer them?
 Do you solve a problem for your customers?
 What kind of internal work environment do you want for your
employees?

Start with a market-defining story

You don’t have to actually write the story—it’s definitely not included in
the mission statement—but do think it through:

Imagine a real person making the actual decision to buy what you sell.
Use your imagination to see why she wants it, how she finds you, and
what buying from you does for her. The more concrete the story, the
better. (And keep that in mind for the actual mission statement wording:
“The more concrete, the better.”)

A really good market-defining story explains the need, or the want, or—if
you like jargon—the so-called “why to buy.” It defines the target
customer, or “buyer persona.” And it defines how your business is
different from most others, or even unique. It simplifies thinking about
what a business isn’t, what it doesn’t do.

This isn’t literally part of the mission statement. Rather, it’s an important
thing to have in your head while you write the mission statement. It’s in
the background, between the words.

Define how your customer’s life is better

because your business exists
Start your mission statement with the good you do. Use your market-
defining story to suss out whatever it is that makes your business special
for your target customer.

Don’t undervalue your business: You don’t have to cure cancer or stop
global climate change to be doing good. Offering trustworthy auto repair,
for example, narrowed down to your specialty in your neighborhood with
your unique policies, is doing something good. So is offering excellent
slow food in your neighborhood, with emphasis on organic and local, at a
price premium.

This is a part of your mission statement, and a pretty crucial part at that—
write it down.

See Also: Your Business Lives and Dies By Its Differentiator

If your business is good for the world, incorporate that here too. But
claims about being good for the world need to be meaningful, and
distinguishable from all the other businesses. Add the words “clean” or
“green” if that’s really true and you keep to it rigorously. Don’t just say it,
especially if it isn’t important or always true.

Consider what your business does

for employees
These days, good businesses want to be good for their employees. If
you’re “hard numbers”-oriented, keeping employees is better for the
bottom line than turnover. And if you’re interested in culture and
employee happiness, then defining what your business offers its
employees is an obvious part of your strategy.

My recommendation is that you don’t assert how the business is good for
employees—you define it here and then forever after make it true.
Qualities like fairness, diversity, respect for ideas and creativity, training,
tools, empowerment, and the like, actually really matter. However, since
every business in existence at least says that it prioritizes those things,
strive for a differentiator and a way to make the general goals feel more
concrete and specific.

While I consulted for Apple Computer, for example, that business

differentiated its goals of training and empowering employees by making
a point of bringing in very high-quality educators and presenters to help
employees’ business expertise grow. That’s the kind of specificity you
should include in your mission statement.

See Also: What Defines Your Company Culture?

With this part of the mission statement, there’s a built-in dilemma. On the
one hand, it’s good for everybody involved to use the mission statement to
establish what you want for employees in your business. On the other
hand, it’s hard to do that without falling into the trap of saying what every
other business says.

Stating that you value fair compensation, room to grow, training, a

healthy, creative work environment, and respect for diversity is probably a
good idea, even if that part of your mission statement isn’t unique. That’s
because the mission statement can serve as a reminder—for owners,
supervisors, and workers—and as a lever for self-enforcement.

If you have a special view on your relationship with employees, write it

into the mission statement. If your business is friendly to families, or to
remote virtual workplaces, put that into your mission.

Add what the business does for its

owners
In business school they taught us that the mission of management is to
enhance the value of the stock. And shares of stock are ownership. Some
would say that it goes without saying that a business exists to enhance the
financial position of its owners, and maybe it does. However, only a small
subset of all businesses are about the business buzzwords of “share value”
and “return on investment.”

In the early years of my business I wanted peace of mind about cash flow
more than I wanted growth, and I wanted growth more than I wanted
profits. So I wrote that into my mission statement. And at one point I
realized I was also building a business that was a place where I was happy
to be working, with people I wanted to work with; so I wrote that into my
mission statement, too.

See Also: An Overview of Lean Business Planning

Discuss, digest, cut, polish, review,

revise
Whatever you wrote for points two through four above, go back and cut
down the wordiness.

Good mission statements serve multiple functions, define objectives, and

live for a long time. So, edit. This step is worth it.

I’ve been writing professionally all of my adult life. I was a foreign

correspondent for a decade, and then I billed more than $2 million in
business plan consulting, and then I wrote books published by
Entrepreneur Press, McGraw-Hill, Dow Jones-Irwin and others, and
thousands of blog posts for this site and a number of high-profile sites;
I’ve never written anything that wasn’t better with editing. And most of
what I’ve written was better after I cut it to half its original length.
As you edit, keep a sharp eye out for the buzzwords and hype that
everybody claims. Cut as much as you can that isn’t unique to your
business, except for those special elements that—unique or not—can
serve as long-term rules and reminders.

Read other companies’ mission statements, but write a statement that is

about you and not some other company. Make sure you actually believe in
what you’re writing—your customers and your employees will soon spot
a lie.

Then, listen. Show drafts to others, ask their opinions, and really listen.
Don’t argue, don’t convince them, just listen. And then edit again.

And, for the rest of your business’s life, review and revise it as needed. As
with everything in a business plan, your mission statement should never
get written in stone, and, much less, stashed in a drawer. Use it or lose it.
Review and revise as necessary, because change is constant.

Legal structure and ownership

LLC Business Basics

A limited liability company (LLC) combines attributes from
both corporationsand partnerships (or for one-person LLCs, sole
proprietorships): the corporation’s protection from personal liability for
business debts and the simpler tax structure of partnerships. And
while setting up an LLC is more difficult than creating a partnership or
sole proprietorship, running one is significantly easier than running a
corporation.
Number of members
Contrary to what you may have learned just a few years ago, you can now
form an LLC with just one person in every state except Massachusetts,
which requires an LLC to have two owners (technically called members).
If you want to form a one-member LLC in Massachusetts and you are
married, you can make your spouse your LLC’s second member.

While there’s no maximum number of owners that an LLC can have, for
practical reasons you’ll probably want to keep the group small. An LLC
that’s actively owned and operated by more than about five people risks
problems with maintaining good communication and reaching consensus
among the owners.

Limited personal liability

Like shareholders of a corporation, all LLC owners are protected from
personal liability for business debts and claims. This means that if the
business itself can’t pay a creditor — such as a supplier, a lender or a
landlord — the creditor cannot legally come after any LLC member’s
house, car or other personal possessions. Because only LLC assets are
used to pay off business debts, LLC owners stand to lose only the money
that they’ve invested in the LLC. This feature is often called “limited
liability.”

Exceptions to limited liability

While LLC owners enjoy limited personal liability for many of their
business transactions, it is important to realize that this protection is not
absolute. This drawback is not unique to LLCs, however — the same
exceptions apply to corporations. An LLC owner can be held personally
liable if he or she:

 personally and directly injures someone

 personally guarantees a bank loan or a business debt on which the
LLC defaults
 fails to deposit taxes withheld from employees’ wages
 intentionally does something fraudulent, illegal, or clearly wrong-
headed that causes harm to the company or to someone else, or
  treats the LLC as an extension of his or her personal affairs, rather
than as a separate legal entity.
This last exception is the most important. In some circumstances, a court
might say that the LLC doesn’t really exist and find that its owners are
really doing business as individuals, who are personally liable for their
acts. To keep this from happening, make sure you and your co-owners:

 Act fairly and legally. Do not conceal or misrepresent material facts

or the state of your finances to vendors, creditors or other
outsiders.
 Fund your LLC adequately. Invest enough cash into the business so
that your LLC can meet foreseeable expenses and liabilities.
 Keep LLC and personal business separate. Get a federal employer
identification number, open up a business-only checking account,
and keep your personal finances out of your LLC accounting books.
 Create an operating agreement. Having a formal written operating
agreement lends credibility to your LLC’s separate existence.

Business insurance
A good liability insurance policy can shield your personal assets when
limited liability protection does not. For instance, if you are a massage
therapist and you accidentally injure a client’s back, your liability
insurance policy should cover you. Insurance can also protect your
personal assets in the event that your limited liability status is ignored by a
court.

In addition to protecting your personal assets in such situations, insurance

can protect your corporate assets from lawsuits and claims. Be aware,
however, that commercial insurance usually does not protect personal or
corporate assets from unpaid business debts, whether or not they’re
personally guaranteed.

LLC taxes
Unlike a corporation, an LLC is not considered separate from its owners
for tax purposes. Instead, it is what the IRS calls a “pass-through entity,”
like a partnership or sole proprietorship. This means that business income
passes through the business to each LLC member, who reports his share
of profits — or losses — on his individual income tax return. Each LLC
member must make quarterly estimated tax payments to the IRS.

While an LLC itself doesn’t pay taxes, co-owned LLCs must file Form
1065, an informational return, with the IRS each year. This form, the same
one that a partnership files, sets out each LLC member’s share of the
LLC’s profits (or losses), which the IRS reviews to make sure the LLC
members are correctly reporting their income.

For more information on LLC taxes, see How LLCs are taxed.

LLC management
The owners of most small LLCs participate equally in the management of
their business. This arrangement is called “member management.”

The alternative management structure — somewhat awkwardly called

“manager management” — means that you designate one or more owners
(or even an outsider) to take responsibility for managing the LLC. The
nonmanaging owners (sometimes family members who have invested in
the company) simply sit back and share in LLC profits. In a manager-
managed LLC, only the named managers get to vote on management
decisions and act as agents of the LLC. Choosing manager management,
however, can complicate securities issues for your LLC.

Forming an LLC
To create an LLC, you begin by filing “articles of organization” with the
LLC division of your state government. This office is often in the same
department as the corporations division, which is usually part of the
Secretary of State’s office. Filing fees are typically $100 or less.

Many states supply a blank one-page form for the articles of organization,
on which you need only specify a few basic details about your LLC, such
as its name and address and contact information for a person involved
with the LLC (usually called a “registered agent”) who will receive legal
papers on its behalf. Some states also require you to list the names and
addresses of the LLC members.
In addition to filing articles of organization, you must create a written
LLC operating agreement. While you don’t have to file your operating
agreement with the state, it’s a crucial document because it sets out the
LLC members’ rights and responsibilities, their percentage interests in the
business and their share of the profits.

Finally, your LLC must fulfill the same local registration requirements as
any new business, such as applying for a business license and registering a
fictitious or assumed business name.

To learn more about these and other details involved in setting up an LLC,
read How to form a Limited Liability Corporation (LLC) .

Ending an LLC
Under the laws of many states, unless your operating agreement says
otherwise, when one member wants to leave the LLC, the company
dissolves. In that case, the LLC members must fulfill any remaining
business obligations, pay off all debts, divide any assets and profits among
themselves, and then decide whether they want to start a new LLC to
continue the business with the remaining members.

Your LLC operating agreement can prevent this kind of abrupt ending to
your business by including “buy-sell” provisions, which set up guidelines
for what will happen when one member retires, dies, becomes disabled or
leaves the LLC to pursue other interests. (See Plan for changes in LLC
ownership with buy-sell provisions for more information.)

Corporation Basics
Most people have heard that forming a corporation provides “limited
liability” — that is, it limits your personal liability for business debts.
What you may not know is that there’s more to creating and running a
corporation than filing a few papers. You’ll need to keep excellent records
to handle the more complicated corporate tax return, and in order to retain
your limited liability, you must follow corporate formalities involving
decision-making and record keeping. In short, you’ve got to be organized.

Limited personal liability

One of the main advantages of incorporating is that the owners’ personal
assets are protected from creditors of the corporation. For instance, if a
court judgment is entered against your corporation saying that it owes a
creditor $100,000, you normally cannot be forced to use personal assets,
such as your house, to pay the debt. Because only corporate assets need be
used to pay business debts, you stand to lose only the money that you’ve
invested in the corporation.

Exceptions to limited liability

There are some circumstances in which limited liability will not protect an
owner’s personal assets. An owner of a corporation can be held personally
liable if she:

 personally and directly injures someone

 personally guarantees a bank loan or a business debt on which the
corporation defaults
 fails to deposit taxes withheld from employees’ wages
 does something intentionally fraudulent, illegal, or clearly wrong-
headed that causes harm to the company or to someone else, or
 treats the corporation as an extension of her personal affairs, rather
than as a separate legal entity.
This last exception is the most important. In some circumstances courts
can rule that a corporation doesn’t really exist and that its owners are
really doing business as individuals who are personally liable for their
acts. This might happen if you fail to follow routine corporate formalities
such as:

 adequately investing in (“capitalizing”) the corporation

 formally issuing stock to the initial shareholders
 regularly holding meetings of directors and shareholders, or
 keeping business records and transactions separate from those of
the owners.
Business insurance
Incorporating should never take the place of good business insurance.
Even though forming a corporation normally protects your personal
assets, you should use insurance to guard your corporate assets from
lawsuits and claims.

A solid liability insurance policy can protect you against many of the risks
of doing business. For instance, if you operate a clothing store, good
business insurance should adequately cover the bill if someone slips and
falls in your store. Also, insurance can protect you where the limited
liability feature will not — for example, if you personally injure someone
while doing business for the corporation, say by causing a car accident,
liability insurance will usually cover the accident so that you won’t have
to use either corporate or personal assets to pay the bill. Be aware,
however, that commercial insurance usually does not protect personal or
corporate assets from unpaid business debts, whether or not they’re
personally guaranteed.

Paying corporate income tax

If an owner of a corporation works for the corporation, he is paid a salary,
and possibly bonuses, like any other employee. He pays taxes on this
income as do regular employees, reporting and paying the tax on his
personal tax return.

The corporation pays taxes on whatever profits are left in the businesses
after paying out all salaries, bonuses, overhead and other expenses. To do
this, the corporation files its own tax return, Form 1120, with the IRS and
pays taxes at a special corporate tax rate.

Alternatively, corporate shareholders can elect something called “S

corporation” status by filing Form 2553 with the IRS. This means that the
corporation will be treated like a partnership (or LLC) for tax purposes,
with business profits and losses “passing through” the corporation to be
reported on the owners’ individual tax returns. To learn more about S
corporations, see S Corporation facts.

For more details on regular corporate taxation, see How corporations are
taxed.
Forming a corporation
To form a corporation, you must file “articles of incorporation” with the
corporations division (usually part of the Secretary of State’s office) of
your state government. Filing fees are typically $100 or so. For most small
corporations, articles of incorporation are relatively short and easy to
prepare. Most states provide a simple form for you to fill out, which
usually asks for little more than the name of your corporation, its address
and the contact information for one person involved with the corporation
(often called a “registered agent”). Some states also require you to list the
names of the directors of your corporation.

In addition to filing articles of incorporation, you must create “corporate

bylaws.” While bylaws do not have to be filed with the state, they are
important because they set out the basic rules that govern the ongoing
formalities and decisions of corporate life, such as how and when to hold
regular and special meetings of directors and shareholders and the number
of votes that are necessary to approve corporate decisions.

Finally, you must issue stock certificates to the initial owners

(shareholders) of the corporation and record who owns the ownership
interests (shares, or stock) in the business.

To learn more about how to form your corporation, see How to form a
corporation.

Retaining corporate status

Corporations and their owners must observe certain formalities to retain
the corporation’s status as a separate entity. Specifically, corporations
must:

 hold annual shareholders’ and directors’ meetings

 keep minutes of shareholders’ and directors’ major decisions
 make sure that corporate officers and directors sign documents in
the name of the corporation
 maintain separate bank accounts from their owners
 keep detailed financial records, and
 file a separate corporate income tax return.
S Corporation Business Facts
and Options
Many entrepreneurs have two goals when choosing a structure for their
business: protecting their personal assets from business claims and having
business profits taxed on their individual tax returns. Not long ago, an S
corporation was the only choice for these business owners. In the last few
years, however, the popularity of S corporations has dropped as limited
liability companies (LLCs) have largely replaced them. Still, S
corporations are appropriate for some businesses. If you’re interested,
read on.

What is an S corporation?
An S corporation is a regular corporation that lets you enjoy the limited
liability of a corporate shareholder but pay income taxes on the same basis
as a sole proprietor or a partner.

In a regular corporation (also known as a C corporation), the company

itself is taxed on business profits. The owners pay individual income tax
only on money that they draw from the corporation as salary, bonuses or
dividends. By contrast, in an S corporation, all business profits “pass
through” to the owners, who report them on their personal tax returns (as
in sole proprietorships, partnerships and LLCs). The S corporation itself
does not pay any income tax, although a co-owned S corporation must file
an informational tax return like a partnership or LLC — to tell the IRS
what each shareholder’s portion of the corporate income is.

Most states follow the federal pattern when taxing S corporations: They
don’t impose a corporate tax, choosing instead to tax the business’s profits
on the shareholders’ personal tax returns. About half a dozen states,
however, do tax an S corporation like a regular corporation. The tax
division of your state treasury department can tell you how S corporations
are taxed in your state.
Should you elect S corporation status?
If your corporation meets certain criteria, such as having only
shareholders who are U.S. citizens or residents, you can elect to do
business as an S corporation. Operating as an S corporation rather than a
regular corporation may be wise for several reasons:

 An S corporation generally allows you to pass business losses

through to your personal income tax return, using it to offset any
income that you (and your spouse, if you’re married) have from
other sources.
 When you sell your S corporation, your taxable gain on the sale of
the business can be less than if you operated the business as a
regular corporation.
But aside from the benefits, S corporations impose strict requirements.
Here are the main rules:

 Each S corporation shareholder must be a U.S. citizen or resident.

 S corporation profits and losses may be allocated only in proportion
to each shareholder’s interest in the business.
 An S corporation shareholder may not deduct corporate losses that
exceed their “basis” in their stock — which equals the amount of
their investment in the company plus or minus a few adjustments.
 S corporations may not deduct the cost of fringe benefits provided
to employee-shareholders who own more than 2% of the
corporation.
Fortunately, your decision to elect to be an S corporation isn’t permanent.
If you later find there are tax advantages to being a regular corporation,
you can drop your S corporation status after a certain amount of time.

How to elect S corporation status

To be treated as an S corporation, all shareholders must sign and file IRS
Form 2553. Shareholders then pay income tax on their share of the
corporation’s income whether or not they actually receive the money. If
the corporation suffers a loss, shareholders can claim their share of that
loss.
S corporation alternatives
You can accomplish the simultaneous goals of limited liability and pass-
through taxation by creating a limited liability company (LLC). Because
an LLC offers its owners the significant advantage of greater flexibility in
allocating profits and losses, and because LLCs aren’t subject to the many
restrictions of S corporations, forming an LLC is often the better choice.
(To learn more about limited liability companies, see “LLC Basics.”)

Consult an expert
Choosing an ownership structure for your business can be complicated.
To find out whether an S corporation, a C corporation or an LLC is the
best fit for your company, consult a tax lawyer or an experienced
accountant who is knowledgeable about the tax advantages and
disadvantages of the various types of ownership structures.

Sole Proprietorship Basics

A sole proprietorship is a business that is owned by one person (and
sometimes his or her spouse) and that isn’t registered with the state as a
corporation or a limited liability company (LLC).

Sole proprietorships are so easy to set up and maintain that you may
already own one without knowing it. For instance, if you are a freelance
photographer or writer, a craftsperson who takes jobs on a contract basis,
a salesperson who receives only commissions or an independent
contractor who isn’t on an employer’s regular payroll, you are
automatically a sole proprietor.

However, even though a sole proprietorship is the simplest of business

structures, you shouldn’t fall asleep at the wheel. You may have to
comply with local registration, license or permit laws to make your
business legitimate. And you should look sharp when it comes to tending
your business, because you are personally responsible for paying both
income taxes and business debts.

Personal liability for business debts

A sole proprietor can be held personally liable for any business-related
obligation. This means that if your business doesn’t pay a supplier,
defaults on a debt or loses a lawsuit, the creditor can legally come after
your house or other possessions.

Examples
Example 1: Lester is the owner of a small manufacturing business. When
business prospects look good, he orders $50,000 worth of supplies and
uses them in creating merchandise. Unfortunately, there’s a sudden drop
in demand for his products, and Lester can’t sell the items he’s produced.
When the company that sold Lester the supplies demands payment, he
can’t pay the bill. As sole proprietor, Lester is personally liable for this
business obligation. This means that the creditor can sue him and go after
not only Lester’s business assets, but his other property as well. This can
include his house, his car and his personal bank account.

Example 2: Shirley is the owner of a flower shop. One day Roger, one of
Shirley’s employees, is delivering flowers using a truck owned by
business. Roger strikes and seriously injures a pedestrian. The injured
pedestrian sues Roger, claiming that he drove carelessly and caused the
accident. The lawsuit names Shirley as a co-defendant. After a trial, the
jury returns a large verdict against Roger — and Shirley as owner of the
business. Shirley is personally liable to the injured pedestrian. This means
the pedestrian can go after all of Shirley’s assets, business and personal.
By contrast, the law provides owners of corporations and limited liability
companies (LLCs) with what’s called “limited personal liability” for
business obligations. This means that, unlike sole proprietors and general
partners, owners of corporations and LLCs can normally keep their house,
investments and other personal property even if their business fails. If you
will be engaged in a risky business, you may want to consider forming a
corporation or an LLC. You can learn more about limiting your personal
liability for business obligations by reading Nolo’s articles
on corporations and LLCs.
Paying taxes on business income
In the eyes of the law, a sole proprietorship is not legally separate from
the person who owns it. The fact that a sole proprietorship and its owner
are one and the same means that a sole proprietor simply reports all
business income or losses on his individual income tax return – IRS Form
1040 with Schedule C attached.

As a sole proprietor, you’ll have to take responsibility for withholding and

paying all income taxes, which an employer would normally do for you.
This means paying a “self-employment” tax, which consists of
contributions to Social Security and Medicare, and making payments of
estimated taxes throughout the year. For more information, see How sole
proprietors are taxed.

Registering your sole proprietorship

Unlike an LLC or a corporation, you generally don’t have to file any
special forms or pay any fees to start working as a sole proprietor. All you
have to do is declare your business to be a sole proprietorship when you
complete the general registration requirements that apply to all new
businesses.

Most cities and many counties require businesses — even tiny home-
based sole proprietorships — to register with them and pay at least a
minimum tax. In return, your business will receive a business license or
tax registration certificate. You may also have to obtain an employer
identification number from the IRS, a seller’s permit from your state and a
zoning permit from your local planning board.

And if you do business under a name different from your own, such as
Custom Coding, you usually must register that name — known as a
fictitious business name — with your county. In practice, lots of
businesses are small enough to get away with ignoring these requirements.
But if you are caught, you may be subject to back taxes and other
penalties.
Partnership Basics

By definition, a partnership is a business with more than one owner that

has not filed papers with the state to become a corporation or LLC
(limited liability company). There are two basic types of partnerships —
general partnerships and limited partnerships. This article discusses only
general partnerships — those in which every partner has a hand in the
management of the business.

The partnership is the simplest and least expensive co-owned business

structure to create and maintain. However, there a few important facts you
should know before you begin.

Personal liability for all owners

First, partners are personally liable for all business debts and obligations,
including court judgments. This means that if the business itself can’t pay
a creditor, such as a supplier, a lender or a landlord, the creditor can
legally come after any partner’s house, car or other possessions.

Second, any individual partner can usually bind the whole business to a
contract or other business deal. For instance, if your partner signs a year-
long contract with a supplier to buy inventory at a price your business
can’t afford, you can be held personally responsible for the sum of money
owed under the contract.

There are just a few limits on a partner’s ability to commit the partnership
to a deal — for instance, one partner can’t bind the partnership to a sale of
all of the partnership’s assets — but generally, unless an outsider has
reason to know of any limits the partners have placed on each other’s
authority in their partnership agreement, any partner can bind the others to
a deal.
Third, each individual partner can be sued for — and be required to pay
— the full amount of any business debt. If this happens, an individual
partner’s only recourse may be to sue the other partners for their shares of
the debt.

Because of this combination of personal liability for all partnership debt

and the authority of each partner to bind the partnership, it’s critical that
you trust the people with whom you start your business.

Partnership taxes
A partnership is not a separate tax entity from its owners; instead it’s what
the IRS calls a “pass-through entity.” This means the partnership itself
does not pay any income taxes on profits. Business income simply “passes
through” the business to each partner, who reports his share of profit — or
his losses — on his individual income tax return. In addition, each partner
must make quarterly estimated tax payments to the IRS each year.

While the partnership doesn’t pay taxes, it must file Form 1065, an
informational return, with the IRS each year. This form sets out each
partner’s share of the partnership profits (or losses), which the IRS
reviews to make sure the partners are reporting their income correctly. For
more information on reporting and paying partnership taxes, see How
partnerships are taxed.

Creating a partnership
You don’t have to file any paperwork to establish a partnership — just
agreeing to go into business with another person will get you started.

Of course, partnerships must fulfill the same local registration

requirements as any new business, such as applying for a business
license (also known as a tax registration certificate) Most cities require
businesses to register with them and pay at least a minimum tax. You may
also have to obtain an employer identification number from the IRS, a
seller’s permit from your state and a zoning permit from your local
planning board.

In addition, your partnership may have to register a fictitious or assumed

business name. If your business name doesn’t contain all of the partners’
last names, as in London Landscapes, you usually must register that name
— known as a fictitious business name — with your county.

While the owners of a partnership are not legally required to have a

written partnership agreement, it makes good sense to put the details of
ownership, including the partners’ rights and responsibilities and their
share of profits, into a written agreement. For more about why partnership
agreements are so important, read Creating a partnership agreement.

Ending a partnership
One disadvantage of partnerships is that when one partner wants to leave
the company, the partnership generally dissolves. In that case, the partners
must fulfill any remaining business obligations, pay off all debts, and
divide any assets and profits among themselves.

If you want to prevent this kind of ending for your business, you should
create a “buy-sell agreement,” which can be included as part of your
partnership agreement. A buy-sell agreement helps partners decide and
plan for what will happen when one partner retires, dies, becomes
disabled or leaves the partnership to pursue other interests. One way a
buy-sell agreement helps avoid this situation is by allowing the partners to
buy out a departing partner’s interest so business can continue as usual.
See Plan for ownership changes with a buy-sell agreement for more
information.
http://articles.bplans.com/partnership-basics/