Bei Project.docx

 Presentation 11.01 http://articles.bplans.com/write-company-overview/#structure http://articles.bplans.com/writing-a-mission-statement/ http://articles.bplans.com/the-key-elements-of-the-financial-plan/ Model- http://www.investor.jnj.com/company-overview.cfm

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. 

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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 longterm 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 marketdefining 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:  

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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 wrongheaded that causes harm to the company or to someone else, or

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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: 

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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 managermanaged 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:  

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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 wrongheaded 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:   

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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: 

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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:  

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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 passthrough 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 homebased 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 yearlong 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/