Small Business Kit For Dummies

by Richard D. Harroch

Overview

Millions of Americans own their own businesses, and millions more dream of doing the same. But starting your own business is a pretty complicated matter, especially with all the legal issues and paperwork. This updated edition of the top-selling small business resource is chock-full of information, resources, and helpful hints on making the transition from a great idea to a great business.

If you’ve got a great idea for your own business, you need the kind of straightforward advice you’ll find here — the kind of advice you’d normally only get from business schools and MBA courses. Small Business Kit For Dummies, Second Edition covers all the basics on:

• Recent tax law changes
• Balancing your finances
• Hiring and keeping employees
• Effective management strategies
• Accounting fundamentals

In addition to the basics of business, you’ll also find top-class advice on more advanced business basics, like business plans, the ins and outs of contracts, and using the Internet to expand your business. For entrepreneurs large and small, this comprehensive resource offers authoritative guidance on all your biggest business concerns, and offers unbeatable advice on such topics as:

• Choosing your business structure — from LLCs to S corps
• How to develop and write a standard business proposal
• Going public, issuing stock, and keeping a stock ledger
• Raising capital and understanding securities laws
• Bookkeeping standard practices
• Tax basics for small businesses
• Handling the paperwork for new hires
• Designing employee compensation plans
• Working with independent contractors and consultants
• Patent and copyright protections
• Dealing with the Press

In addition, the book includes a CD-ROM full of helpful resources — forms, contracts, and even sample versions of the most popular software for small businesses. With Small Business Kit For Dummies you’ll find all the tools you need to get your small business up and running — and keep it running for years and years to come.

Product Details

ISBN-13:	9781118054109
Publisher:	Wiley
Publication date:	03/11/2010
Series:	For Dummies Books
Sold by:	JOHN WILEY & SONS
Format:	eBook
Pages:	416
Sales rank:	555,359
File size:	54 MB
Note:	This product may take a few minutes to download.

About the Author

Richard D. Harroch is an attorney with over 20 years of experience in representing start-up and emerging companies, entrepreneurs, and venture capitalists. He is listed in Who’s Who in American Law and is a corporate partner in a major law firm in San Francisco. He is a Phi Beta Kappa graduate of U.C. Berkeley and graduated from UCLA Law School, where he was managing editor of the Law Review. He has edited or co-authored a number of legal/business books, including Start-Up and Emerging Companies: Planning, Financing and Operating the Successful Business and Partnership and Joint Venture Agreements.
Richard was the chairman and co-founder of AllBusiness.com, one of the premier Web sites for small businesses. He was also the founder, CEO, and chairman of LawCommerce, Inc., an Internet company dedicated to providing products and sources to the legal profession.
He has lectured extensively before various legal and business organizations, including the American Electronics Association, the Venture Capital Institute, the California Continuing Education of the Bar, Law Journal Seminars-Press, the California State Bar Business Section, the Corporate Counsel Institute, the San Francisco Bar, and the Practicing Law Institute (PLI).
Richard has served as the chairman of the California State Bar Committee on Partnerships, the co-chairman of the Corporations Committee of the San Francisco Bar (Barristers), a member of the Executive Committee of the Business Law Section of the California State Bar, and co-chair of the Law Journal seminar in New York on “Joint Ventures and Strategic Alliances.”
Richard has experience in the following areas: start-up and emerging companies, corporate financings, joint ventures, strategic alliances, venture capital financings, employment agreements, IPOs, leases, loans, online and Internet matters, license agreements, partnerships, preferred stock, confidentiality agreements, stock options, sales contracts, securities laws, and mergers and acquisitions.

Read an Excerpt

Small Business Kit For Dummies

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By Richard D. Harroch

John Wiley & Sons

ISBN: 0-7645-5984-2

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Chapter One

Choosing Your Business Entity

In This Chapter

* Flying solo: Sole proprietorships

* Getting a grip on partnerships

* Checking out corporations

* Looking into LLCs

When starting a business, you need to decide early on what legal form the business should take. The common choices are sole proprietorships, general partnerships, limited partnerships, C corporations, S corporations, and LLCs (Limited Liability Companies). Each entity has advantages and disadvantages, and the right choice depends on the nature of your proposed business and various tax and liability issues. In this chapter, I outline the key points that you need to know about choosing the right entity for your business.

FORM

Form 1-1 on the CD-ROM (and shown later in this chapter) summarizes the key differences between various types of business entities. You need to pay special attention to tax and liability issues.

Setting Up Sole Proprietorships

Some businesses are formed as sole proprietorships. In this case, the business has only one owner - you. Sole proprietorships are easier to set up than corporations or other entities.

STATE BY STATE

To establish a sole proprietorship, you typically need to file a fictitious name certificate at a local or state governmental office if you're doing business under a name different than your own. This certificate, in essence, notifies the world who the business's true owner is, such as "John Smith, d.b.a. Blue Vision Flowers." The d.b.a. abbreviation stands for "doing business as."

WARNING!

Sole proprietorships are not advisable if you plan to do any significant business because you face unlimited liability for the business's debts - a real disadvantage. Plus, you can have a difficult time growing the business and attracting investors to a sole proprietorship.

The following key points characterize a sole proprietorship:

  Business transferability: Selling your business involves selling the business assets and may be more complicated than selling a corporation.

  Existence: After you die or become disabled, the business may have difficulty continuing on, both legally and business-wise.

  Expenses: You must keep careful records of your personal expenses versus your business-related expenses. The IRS may challenge your handling of certain expenses if it thinks that those expenses may not be legitimate, deductible business costs.

  Licenses: You may need various business licenses, sales tax licenses, or permits.

  Personal liability: You have personal liability for all of the business's debts and obligations. If something goes wrong with the business, your personal assets (home, car, and bank savings) may be at risk.

  Tax: The IRS taxes you and your business as one for income tax purposes. Tax rates for corporations may be more advantageous than tax rates for individuals. (Check out the tax discussion in Chapter 6.)

Creating a Partnership

You can set up your business as a partnership consisting of two or more partners. Partnerships come in three types: general, limited, and limited liability. Limited Liability Companies (LLCs) are similar in some ways to partnerships. I describe LLCs in the section "Helpful Hybrids: Limited Liability Companies" later in this chapter.

General partnerships

General partnerships consist of two or more partners. You can create general partnerships with little or no statutory formalities, although you probably want to have a Partnership Agreement that sets forth the partners' rights and obligations.

WARNING!

Avoid general partnerships like the plague! Each partner in a general partnership may be liable for the debts and obligations of the partnership - not a good situation to be in if things go bad. If you insist on having a partnership, make sure that you have a well-drafted Partnership Agreement and a lot of insurance.

General partnerships tend to be easy to establish and can be more informal than business entities like corporations. But the disadvantage of the partners' horrendous unlimited personal liability more than offsets this advantage.

The following key points typically characterize general partnerships:

  Personal liability: The general partners have potential personal liability for the partnership's debts and obligations. If something goes wrong, your personal assets, not just the partnership assets, are at risk.

  Control and management: Unless limited by the Partnership Agreement, each general partner has an equal right to share in the management and control of the partnership.

  Authority: Unless limited by the Partnership Agreement, any partner can take actions and sign contracts that bind the partnership.

  Owners and profits: The owners of the business are partners and split profits and losses as they agree upon.

  Number of owners: You can have an unlimited number of general partners.

  Formation: General partnerships can be more expensive to form than corporations because you want a lawyer to prepare a detailed Partnership Agreement. Typically, you don't need to have any state filings to form a general partnership. Some local filings may be necessary if the partnership holds real estate.

WARNING!

Partnership Agreements can be very complicated. This area is one where working with a lawyer is definitely to your advantage.

  Fiduciary relationship: General partners stand in a fiduciary relationship with each other, meaning that partners generally must act with undivided loyalty, good faith, fairness, and honesty in dealing with each other.

  Existence: A general partnership doesn't last forever, and you can dissolve it at the end of a specified term, on the death of a partner, or on other events.

  Transferability of interests: You face real problems trying to transfer general partnership interests, and unless the Partnership Agreement provides otherwise, a person generally can't become a member of the partnership without the consent of all or most of the partners.

  Tax: The IRS taxes the partners, not the partnership, on partnership income (called pass-through taxation), thus avoiding the potential double taxation present in regular corporations. (For more tax details, see the tax discussion in Chapter 6.)

FORM

Form 1-2 on the CD-ROM includes a checklist of issues that you should consider when drafting a Partnership Agreement.

Limited partnerships

A limited partnership consists of one or more general partners and one or more limited partners. The general partners typically get to make all business decisions, and the limited partners are typically passive investors.

Many businesses have used limited partnerships for owning real estate, restaurants, oil- and gas-related activities, and venture capital funds.

A limited partnership requires you to file an organizational form certificate with the Secretary of State. A Limited Partnership Agreement, setting out the rights and obligations of the general and limited partners, is also important.

TIP

Limited partnerships can raise money from passive investors while allowing the general partner to retain near total control of how the business is run. Limited partnerships can be good business structures, especially for real estate holdings, but LLCs (which you can find in the section "Helpful Hybrids: Limited Liability Companies" later in this chapter) or corporations are typically better for operating businesses.

The following key points typically characterize limited partnerships:

  Limited liability: Limited partners aren't personally liable for the partnership's debts and obligations, although their investment in the limited partnership is, of course, at risk for the payment of partnership obligations. The general partners have unlimited liability for the partnership's debts and obligations, and for that reason, the general partner shouldn't be an individual. Instead, consider having the general partner be a corporation or LLC.

  Control and management: Typically, the general partner has the say in all management decisions. However, the Limited Partnership Agreement can give the limited partners various voting rights, such as the right to approve the sale of the business or the right to remove and replace the general partner.

  Fiduciary relationship: The general partner has a fiduciary (trust) relationship to the limited partners and therefore has a legal obligation to look out for their interests.

  Securities laws: A limited partnership interest is usually considered a "security" under federal and state securities laws, requiring that you be in compliance with those laws. (See Chapter 4 for a discussion of securities laws.)

  Number of owners: You can have an unlimited number of owners.

  Transferability of interests: Transfer of interests typically requires the general partner's approval.

  Profits and losses: The Limited Partnership Agreement sets forth the partners' rights to profits and losses. You can split up profits and losses in any number of ways.

  Tax: The partners, and not the limited partnership, are taxed on partnership income (pass-through taxation), thus avoiding the potential double taxation that regular corporations may face.

FORM

If you're going to have a limited partnership, review Form 1-3 on the CD-ROM for a checklist of the items that you should consider including in a Limited Partnership Agreement.

Limited Liability Partnerships

Limited Liability Partnerships (LLPs) are a new entity authorized by certain state laws. LLPs are basically general partnerships with a liability shield for partners. Liability shields come in two basic types: one for tort matters (like negligence claims), and the other to insulate the partners from the partnership's tort and contract obligations.

STATE BY STATE

In many jurisdictions, the law allows only professionals to use LLPs. For example, California LLPs typically are formed only by lawyers and accountants.

LLPs are typically taxed as pass-through entities, with the partners, not the entity, paying taxes on the business's earnings.

TIP

LLPs are useful in one primary sense - if you have an existing general partnership, and you can qualify for LLP status, you should absolutely convert to LLP status. Such a conversion has little downside, and you can start to protect the partners from the business's various liabilities.

For the most part, however, you should form new businesses as corporations or LLCs, rather than LLPs. (See the section "Helpful Hybrids: Limited Liability Companies" later in this chapter for a discussion of LLCs.)

Corps Is Short for Corporation, Not Corpses

A corporation is a separate legal entity formed under a state corporation law. The corporation has shareholders who own stock in the company, a board of directors who have responsibility for overall management of the company, and officers who run its day-to-day affairs.

A key advantage of a corporation is that if it is properly formed and operated, the shareholders are shielded from the corporation's debts and liabilities. Should something go wrong, you only risk the amount that you have invested in the corporation. And, if someone sues the corporation, you're not personally responsible for any damages that a court may award (unless you fail to follow the rules for forming and operating the corporation, as I explain in Chapter 12).

The corporate business entity doesn't protect professionals, such as accountants, doctors, or lawyers, from personal liability for their negligence or malpractice, but it can shield them from personal liability for the acts of their co-owners.

The two main kinds of corporations are C corporations and S corporations. The difference between the two is in the type of tax treatment on the business's earnings. In a C corporation, the government taxes the business's income at the corporate level, and if the corporation distributes any dividends to the shareholders, the shareholders can also pay a tax on that income. This practice is sometimes referred to as double taxation. In an S corporation, the government considers that the business income has passed through to the shareholders who are then taxed on their pro rata share (the percentage that they own) of the corporation's income.

C corporations

The word "corporation" usually refers to a C corporation. C corporations have limited liability and are well-understood entities that can accommodate many businesses. On the downside, corporations require that you follow a fair number of formalities and make several governmental filings. For C corporations, the double tax can be a real expense.

FORM

Form 1-4 on the CD-ROM contains a checklist of issues to consider when you decide to form a corporation. I tell you how to correctly form a corporation in Chapter 3.

TIP

Corporations make a lot of sense for new businesses - especially if you plan to grow the business and attract investors. Also, you can sell a corporation more easily than almost any other entity. And, if you have hopes of taking the company public, you almost surely have to make the business a corporation.

(Continues...)

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Excerpted from Small Business Kit For Dummies by Richard D. Harroch Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Foreword.

Introduction.

Part I: Starting Up Your Business.

Chapter 1: Choosing Your Business Entity.

Chapter 2: Business Plans.

Chapter 3: Organizing a Corporation.

Part II: Money Matters.

Chapter 4: Raising Capital for Your Business.

Chapter 5: Bookkeeping and Accounting Basics.

Chapter 6: Small Business Tax Basics.

Part III: Employee and Consultant Issues.

Chapter 7: Employee Hiring Tools.

Chapter 8: Motivating and Retaining Employees.

Chapter 9: Avoiding Employee Problems.

Chapter 10: Independent Contractor and Consultant Agreements.

Part IV: Bulletproofing Your Business.

Chapter 11: Key Contracts.

Chapter 12: Legal Issues.

Chapter 13: Protecting Your Ideas and Inventions.

Chapter 14: Avoiding Customer Problems.

Chapter 15: Real Estate Leases for Your Business.

Part V: Spreading the Word.

Chapter 16: Web Sites, Your Business, and You.

Chapter 17: Press Releases and Dealing with the Press.

Part VI: The Part of Tens.

Chapter 18: Ten Ideas to Make Your Business More Successful.

Chapter 19: Ten Great Web Sites for Small Businesses.

Chapter 20: (Almost) Ten Great Publications for Small Businesses.

Appendix: What’s on the CD-ROM.

Index.

End-User License Agreement.