The ABCs of Business Structure A small business can adopt a number of business structures for tax and legal purposes. Each has its own advantages and disadvantages. Sole proprietorships, partnerships, and limited liability companies (LLCs) are fairly basic forms of ownership, whereas corporations are significantly more complex. There are two primary types of corporations in the United States. C and S corporations may provide broader legal protections, but usually must meet more demanding legal requirements. Some states also recognize benefit corporations, a new legal structure that tends to appeal to “social entrepreneurs.”1 A corporation is a separate legal entity from its owners, a distinction that explains why shareholders generally cannot be held liable for a corporation’s debts. Tried and True Introduced in 1958, S corporations were originally intended to offer tax relief to small, privately held companies.2 S corps share many of the formal corporate requirements as C corps, including articles of incorporation (and other document filings), a board of directors, an annual meeting, corporate minutes, and shareholder votes on major decisions. S corps are limited to one class of stock and a total of 100 shareholders. The primary difference between C and S corporations has to do with taxation. C corps may be subject to corporate income tax at both the federal and state levels, and any earnings distributed to shareholders as dividends are taxed again at personal income tax rates. S corp profits and losses are “passed through” to shareholders, who are taxed at individual income tax rates. Both types of businesses must file annual tax returns. An Idealistic Newcomer Seven states have passed benefit corporation laws in the last two years, and at least four others are considering them.3 Normally, corporations are legally required to act in such a way as to ensure the greatest profitability for shareholders, which can result in legal or ethical challenges for some socially conscious firms. A benefit corporation’s status may compel the board of directors to consider the social and/or environmental implications of some decisions. When choosing an ownership structure for your new or growing business, it’s important to weigh the potential costs and benefits of the various options and consult with your tax or legal professionals. Your firm’s unique needs and characteristics may also influence your decision. 1, 3) The Wall Street Journal, January 19, 2012 2) Small Business Administration, 2012 The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek Naperville Small Business Planning advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Related articles

• Incorporating Your Business: Pros and Cons (blogs.findlaw.com)
• LLC vs S Corp vs C Corp vs Not Incorporating at All (bizsugar.com)

Hanging the “Help Wanted” Sign

Toward the end of 2011, an index that measures the hiring intentions of small businesses rose to its highest level in three years, and another report estimated that small businesses have added about 1.2 million new jobs since October 2009.^1–2 All told, businesses with fewer than 500 employees have created about 65% of new jobs in the United States over the last 20 years.³

Business owners may need to invest a fair amount of time and money to build a good team. Adding a salary can be substantial by itself. However, you must also consider the potential costs and responsibilities beyond wages when you are ready to hire new staff members.

Begin with the Big 4

Benefits. Employers that provide benefits such as health and dental plans, disability coverage, and life insurance may need to factor in costs ranging from 1.25 to 1.4 times the base salary. For example, an employee who earns $35,000 annually may actually cost the employer $44,000 to $49,000. You may also need to increase the budget for perks provided to existing employees — from free coffee to holiday parties and bonuses.⁴

Recruiting. It’s not always easy to find the right fit for a new position. There are potential expenses associated with recruiting, including advertising, drug screenings, background checks, as well as the cost for someone to review resumes, screen applicants, and conduct interviews.

Training. Getting new employees up to speed and making sure they become as productive as possible can also be expensive. Employees spend an average of 32 hours a year on training, and new hires often need additional time to learn the ropes. One report estimated that companies spend about $1,200 annually per employee on training.⁵

Compliance. Employers must often deal with a complicated array of federal and state regulations. Research may be needed to understand the possible cost of implementing requirements that apply specifically to your area and/or industry.

It’s exciting to discover an opportunity to expand the size or scope of your business, and sometimes extra help is needed to make that happen. Fortunately, successful small businesses are likely to continue providing employment opportunities in the years to come.

1) Businessweek, December 13, 2011
2) The Wall Street Journal, November 30, 2011
3) Associated Press, December 14, 2011
4–5) Yahoo! Finance, July 25, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Small Business planning advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Related articles

• I Hired a Zombie: The True Cost of a Bad Hire [INFOGRAPHIC] (mashable.com)
• The Number One Reason Employees Stay in a Small Business, According to Employers (smallbiztrends.com)

Small Companies Face Costly Cybersecurity Threats

Possibly because many large corporations have enhanced their security policies, 40% of all targeted Internet attacks are directed toward more vulnerable companies with fewer than 500 employees. Unfortunately, only 52% of small businesses have a basic cybersecurity plan.¹

Small businesses often use the Internet to market their products and services, accept electronic payments, and run their operations effectively. Owners who ignore potential cybersecurity issues may be taking a significant risk.

Whether a company relies on one laptop computer or depends heavily on e-commerce, small-business owners can shore up their defenses and help protect their financial interests.

To help owners understand basic precautions, the Federal Communications Commission (FCC) has introduced the Small Biz Cyber Planner (www.fcc.gov/cyberplanner), a free online tool that allows visitors to customize a planning guide based on their online presence.

Here are a few general cybersecurity tips for small businesses from the FCC.

• Install and update antivirus and antispyware software on every computer.
• Maintain firewalls between the internal network and the Internet to keep outsiders from accessing data on a private network, and make sure that home computers used to conduct business also have firewalls.
• If you have a Wi-Fi network, set it up so that the network name is hidden and a secure password is required for access.
• Create backup copies of important business data and information.
• Lock up computers to prevent them from falling into the wrong hands. Notebooks and tablets, in particular, can easily be stolen if left unattended.
• Train employees in security practices and set up a separate account for each user. Limit the authority to install software and provide access only to the data needed for users to perform their jobs.
• Require all passwords to be changed on a regular basis.

Recovering from a breach can be time-consuming and expensive for companies with smaller staffs and limited resources. Moreover, a company may be held responsible if its customers’ personally identifiable information is disclosed.Internet liability insurance may help shield firms conducting business on the Web from risks related to computer hacking, spam, viruses, and other online perils (up to policy limits).

1) Reuters, October 24, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville small business planning advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Preparing to Turn the Corner

What happens to a multiple-owner business when one of them chooses to retire or must leave suddenly for some other reason? Death, disability, divorce, and bankruptcy are just a few of the distressing kinds of events that can affect one owner and threaten the future of the entire business. In the midst of an unsettling transition, it may be difficult or even impossible for all interested parties to come to terms.

It’s often easier to decide exactly how a business should proceed long before something life-changing happens, when the potential effects are still hypothetical and reciprocal. A properly drafted buy-sell agreement is a binding contract that establishes how ownership shares should be transferred when specified triggering events occur, and it may provide a mechanism for determining the value of transferred shares.

Several Ways to Go

A buy-sell agreement can be structured to fit a business’s unique circumstances and typically may be used by any business entity, including corporations, partnerships, LLCs, and even proprietorships. Basic buy-sell agreements include:

• Cross-purchase agreement: Stipulates that the remaining owners will purchase the interest of the departing owner.
• Redemption agreement: Provides for the business entity to purchase the interest of the departing owner.
• Hybrid agreement: The business itself has the first option to buy, but if it declines because it is more advantageous for the shareholders to buy, then the shareholders are the purchasers.

Execution Is Everything

Pre-arranging for the business or the partners to buy out a departing owner may be a good idea, but it could prove fruitless if the sale is unexpected and the buyers don’t have the money to close a transaction. For that reason, it may be helpful to fund a buy-sell agreement with life insurance and/or disability income insurance. The guaranteed liquidity from the policies may help prevent survivors from being forced to sell assets or borrow money.

The cost and availability of insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing an insurance strategy, it would be prudent to make sure that you are insurable. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville  small business planning advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc.

Related articles

• Top Strategies on Buy-Sell Agreements for Entrepreneurs Featured on Kauffman eVenturing (kauffman.org)