Monthly Archives: June 2017

Business Structure Issues – Key Differences Between an LLC, S-Corp, C-Corp and Sole Proprietor

Business owners have several choices of how they can operate a business. The decision should be well thought out and be able to meet their objectives. Here are some of the pros and cons of each structure:

Sole Proprietor: The easiest form of operating your business is as a sole proprietor. A sole proprietor has a much lighter administrative burden because you account for your business activity on your individual tax return. You may not need to file quarterly payroll tax returns, and may not need worker’s comp insurance. The downside to operating as a sole proprietor is unlimited legal liability, high self-employment taxes, and a much, much greater potential to be audited by the IRS than other taxpayers.

Limited Liability Company: A limited liability company, usually referred to as an LLC, offers greater legal protection than a sole proprietor, and is also extremely flexible. Depending upon various factors and elections, an LLC may be taxed as a sole proprietor, partnership, C-corporation, or S-corporation. In practice, we usually see single-member LLC’s that are taxed as sole proprietors, which means that they have the same downsides as well.

C-Corporation: A C-corporation offers legal protection like an LLC. The drawback is that you have to abide by more legal formalities, including paying yourself reasonable wages, hold annual meetings and take minutes, and also pay additional corporate taxes.  When you want to distribute the corporate’s profits, you will pay taxes yet again as they are considered dividends. C-corporations have their place, but are generally suitable for larger corporations.

S-Corporation: A variation of the C-corporation is the S-corporation. An S-corporation operates just like a C-corporation, but avoids the corporate level tax by taxing profits on the owner’s individual tax return, and has the potential to save employment taxes. The downside to an S-corporation is a higher administrative burden.

As you can see there are many pros and cons to each business structure and the decision should not be taken lightly. If you are thinking about choosing or changing your business structure, then you need to speak to a CPA or attorney who is very experienced with these matters.

What I Learned as a Paperboy

When I was 11 years old up until age 13 I was a paperboy. As far as I know they don’t exist anymore in North Jersey, and I was one of the last paperboys to deliver The Record until they replaced us all with adults. It wasn’t until I owned my own CPA firm that I realized how many business lessons and good habits I learned during that time.

Customer Relationships: I had pretty good relationships with my customers even though most of them never met me before I delivered their newspapers. Most paperboys in my area delivered newspapers on the same two small streets where they lived. Mine was three and four blocks away, which seemed liked miles when you were a kid. Whether my customers liked their newspapers under their mat, on their mat, in their door, or in the railing – I delivered it according to their preference. I remember one customer that wanted their newspaper inside their front door and once I opened the door a cloud of cigarette smoke combined with warm air would come rushing towards me. Their house was so warm that there was condensation on their storm door.

Getting Paid: Most small business owners, and especially service-based businesses and professionals know how painful it can be to ask customers for money, especially when their account is overdue. Every Friday night I would make my rounds to my customers and collect what they owed and would hopefully receive a tip. If my memory is correct, Sunday only delivery was $1 and every day customers were $2. If I received more than $.50 in tips from a customer, then that was a big deal. The best time was during Christmas when the tips were much bigger and I earned more than the $25 weekly average. For the first Christmas, my customers didn’t know me too well, but I still made about $75 in extra tips, but during the next Christmas I made about $300!

Connecting with People: I really liked my customers and each was unique. I remember one family that was kind of quiet, but realized that they had lizards as pets. Once we started to talk more (I owned an iguana), the relationship changed. It’s not all about the money, and connecting with people gives your business much more meaning.

You Can’t do it Alone: The Sunday newspaper was a really large paper back then, almost like a large encyclopedia.  Since my route was several blocks away, and I could only fit a few of the Sunday papers in my newspaper bag, which was hung on my bike, I had the help of my mom on Sunday mornings. We would load up the newspapers in the back of her old Buick station wagon and I would deliver them right from the car and walk or run to each house. I am sure that my mom’s station wagon used up more gas than what I earned for the day. I think that I was half asleep, but my mom would encourage me to “speed it up.” We all need people to help us out and to encourage us.

Being a paperboy was such a rewarding experience, and I wonder how many of my old paper route customers are still living on those same streets. I’m sure most aren’t around anymore, but I will always remember them.

Choose Your Business Partner Wisely

Running your own business is challenging enough, and you don’t want the added burden of having to worry about your business partner. When choosing a business partner you should keep in mind that this decision can make or break your business. Here are a few things to look for and some things to avoid:

What to Look For:

Synergy: Everyone has their strengths and of course their weaknesses. You want to make certain that your partner’s strengths offset your weaknesses and vice versa so that 1 + 1 = 3. For example, one partner may be good at bringing in business and the other at managing the operations of the business. Together the two of you should thrive.

Work Ethic: You want someone who is willing to go all in as opposed to testing the waters and holding back. Your partner should also be willing to go the extra mile to get things done, and have a sense of personal accountability.

Experience: Ideally, your partner should have experience in your industry. Also, experience as a successful business owner is a plus.

What to Avoid:

Financial, Tax or Legal Problems: If your partner has financial problems, then this may be a sign that they will mismanage your business too. Additionally, you don’t want to have their problems become your problems.

Instability: This can mean someone who is currently experiencing personal problems, such as marital problems or family health issues. It’s better to have your potential partner work out their problems first so that they can fully focus on the business.

You will most likely spend enormous amounts of time with your business partner, and both of you will share in the success or failure of your business. Choose your partner wisely.