Sunday, October 21, 2018

Sole Proprietorship vs LLC vs Corporation

Planning to start a new business?

Do you know which business structure would be the right choice for you?

As a new business owner, you might already have a lot on your plate with regards to your liability, taxes, and more. Selecting the right structure plays a crucial role in all of these decisions.

For most small businesses not wanting to form a partnership, the three common options are Sole Proprietorship, Limited Liability Company (LLC), and Corporation.

Sole Proprietorship vs LLC vs Corporation

Each of these structures has their own benefits and drawbacks, making it very important for a businesses owner to understand their differences.

While it is not wrong to rely on your legal team to make the right decision, as a business owner you too should know at least the basics of these different types of business structures.

If you’ve already tried understanding the differences but all the legal mumbo-jumbo have only resulted in more confusion, this post can definitely help.

It attempts to help you understand these common business structures in the easiest possible manner.

So, what are you waiting for?

Let us begin.

1. Sole Proprietorship

As compared to a corporation or LLC, a sole proprietorship is the easiest way to start a new business. Apart from obtaining the required business permits and licenses as per the state and country laws, a sole proprietorship does not require any legal action. It primarily operates as an extension of yourself, and you and your newly formed business have no legal distinctions.

As a matter of fact, even the profit and loss statement of your business flows directly through your tax returns. In simple words, all the profits you earn is reported as your individual income and taxed accordingly. 

The major demerit of this business structure is that the owner is responsible for all the liabilities. This means in the event when the business fails and is sued by someone, the court  may attach personal assets of the owner to recover the damages.

The majority of the small businesses, as well as home-based businesses, thus prefer sole proprietorship as it is the least complicated structure.

2. Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a preferred option for new businesses looking for legal protection. Unlike sole proprietorship where the business owner is responsible for all the financials and legalities, the business owner, as well as the directors of the company, remain legally protected in case of an LLC.

However, if you’re the sole owner of the business but still form an LLC, the IRS would generally continue to treat your business as a sole proprietorship. In such cases, your tax returns and business income are treated just like sole proprietorships.

To form an LLC, you’re required first to file the appropriate documents which vary across the states. Generally, you’ll be required to select the business name, select the registered agent, file article of organization and draft an operating agreement.

While home-based businesses prefer sole proprietorship, if you know you’ll be dealing with a lot of money, clients, and customers in future, it is better to form an LLC as it’ll provide legal protection.

Many of the businesses start as a sole proprietorship and then switch to LLC.

3. Corporation

A single or multiple stockholders own a corporation. The stockholders elect the board of directors for the company. The board can also have a single director.

It is the responsibility of the director’s, to appoint the officers who’ll handle the business operations. Just like LLC, the directors, officers, as well as the stockholders of the company are legally protected against company liabilities in the case of corporations.

Unlike sole proprietorships, corporations are separate entities whose taxes are separately filed. The federal income tax for corporates are not within the graduated tax brackets, and in a lot of states, they’re also required to pay franchise tax.

To start a corporation, you’d at least have to file the articles of incorporation and create bylaws. Apart from this, the other requirements generally vary between states. Corporations that have a lot of stockholders are also required to register themselves with SEC for issuing shares. However, smaller corporations that only have a few stockholders are allowed to apply for an exemption of filing.

A corporation is generally a preferred option for new business if there are multiple business owners who are investing a lot of money in it. If you also plan to raise more funds by selling company shares, you’ll have to form a corporation.

Conclusion

While a large number of small businesses generally prefer sole proprietorship, but LLC is generally the best option to go for. The primary reason being the limited liability protection and the taxation flexibility.

Now that you understand the differences, you can now sit with your legal team to discuss the advantages and disadvantages of these structure options and make the best decision for your new business.

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source https://businessentity.org/learning-center/sole-proprietorship-vs-llc-vs-corporation/

Sunday, October 14, 2018

Member-Managed LLC vs. Manager-Managed LLC

Starting a new business can be confusing. After all, there are so many formalities one needs to take care of during the entrepreneurial journey.

Once you have decided to form an LLC, the next big decision you’ll have to make is – figuring out the right management style for your company.

This is one decision that you don’t want to take in a hurry. After all, the management style plays a major impact on the success of your business.

Speaking of LLC Management types, you have two options before you – to go in for a Member-Managed LLC or a Manager-Managed LLC. So, what do these terms mean? And, coming to the more important question – which one is the right fit for your business?

Member Managed LLC Vs Manager Managed LLC

Spend some time in getting your head around seemingly-complex business jargon, and it will make the process of doing business, a breeze.

Who is a member in an LLC?

In LLC terminology, people who own the business are referred to as “members.” An LLC can be owned by a single person or more than one person. When the LLC has a sole owner, it can have only one member. On the other hand, when there are multiple owners, the LLC automatically has multiple members.

First things first,

What’s the Primary Difference between Member-Managed LLC and a Manager-Managed LLC?

In a member-managed LLC, the daily operations of the business and the overall decisions are done by the members (aka owners) of the LLC.

On the other hand, in a manager-managed LLC, the operations and decisions are done by an appointed manager. This manager can either be a member of the LLC or a third-person.

When to Choose the LLC’s Management Style?

You’ll have to make this important decision before you begin operations of your LLC. The operating agreement you submit needs all details about your LLC – including who will manage it. Don’t wait until later to decide on the management style, as it could lead to legal difficulties.

Can you Change the LLC’s Management Style Later on?

Yes. You can change your choice later on (even years down the line), by amending the Operating Agreement. This change needs the approval of the LLC’s members.

Member-Managed LLC – When it Works and when it Doesn’t!

In a member-managed LLC, all members are involved in the decision making processes as well as operations. This is a good method to proceed when the members are a tight-knit team and want to be actively involved in the growth of the business and share the same vision.

  • Pros:
    All members have an equal say and share equal responsibilities. There’s no finger-pointing if something goes wrong.
  • Cons:
    When everyone gets a say in the decision making, disagreements crop up often, and it becomes difficult to arrive at a unanimous decision. This makes it difficult to take the business to the next level.

Manager-Managed LLC – When it Works and when it Doesn’t!

In a manager-managed LLC, the business appoints managers (an individual or a team) to oversee the day-to-day operations, as well as, to take responsibility for all decisions. This method is usually preferred, when the LLC has several members, and it would become difficult for business operations for all of them to get involved.

The manager can either be a member or a non-member (chosen for his managerial skills).

  • Pros:
    The manager is someone who has either experience managing the business or has the required management skills. This streamlines operations and takes the business on the right trajectory.Additionally, if you have angel investors in your LLC, then you can opt for this model. This way, your investors remain, passive members, while you get to manage the business on your terms.
  • Cons:
    Some members (even though they agreed to this management sty

Here’s an example for when the manager-managed LLC is the right option.

Say, a business is co-founded by three friends, two of whom were involved in the product manufacture, while the third person, was responsible for meeting investors and funding. Then, it makes sense to appoint the third co-founder as the manager, and the rest two focus on optimizing the product lineup.le) may feel left out or powerless when they feel that the business isn’t heading the way, they wanted.

How to Choose the Management Style of the LLC?

Generally, businesses opt for a member-managed LLC, if it’s not feasible for all members to be involved in the operations, or when a few members want to remain just as investors in the firm.

However, No one answer fits all. All businesses are unique. Here are a few questions to ask to figure out the right answer.

  • Do all co-founders want to be involved in the business? Or do some members want to remain just investors?
  • Do all owners of the business have the skills to manage it? Remember that different people bring different skills to the table. Some may be good at the design table, while others are better at people-facing tasks and so on.
  • Do all members share the same goals and visions for the business, or is there a potential for frequent disagreements?
  • Will disagreements lead to confrontations and deadlocks? Or will they be able to resolve issues smoothly? What’s the dynamic quotient among the owners?
  • Do you have angel investors?

Deciding the right style of management plays a crucial role in the success of your business. So, get all the members together, discuss the pros and cons to find the right solution that is the perfect match for your specific business requirements.

Still undecided?

If you’re still not sure, “which is the right option for your business?”, reach out to professionals who can run the pros and cons of each management style with you, and help you take the right decision.

Last Updated: 15/10/2018

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source https://businessentity.org/learning-center/member-managed-llc-vs-manager-managed-llc/

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