My boyfriend and his silent partner own a small 'head shop' tobacco store.
He was told when getting an insurance quote that he needs to incorporate. I have tried to do some online research about the pros and cons but its not to my satisfaction. They only sale about 1,500 of goods per month and this months expenses were about 977.
So, being so small shouldn't my boyfriend apply for a small business loan as a sole business owner first?
Or is what I read true that to get business lines of credit its better to be incorporated?
Thanks for the help
Thank you very very very much! I knew asking the question here was the best place.
I would talk to an account and a lawyer about your options...
http://www.irs.gov/businesses/small/article/0,,id=98359,0...
even view the link above with the IRS.
My husband and I both own companies. Make sure you talk to a QUALIFIED AND EXPERIENCED CPA or accountant. They will know all the requirements in CA. My husband was filed wrong before I knew him in 2004. He ended up owing over 40k in taxes over 2 years. In 2006, his new CPA caught it, fixed it, but didn't refile those 2 years...NICE! So he's been struggling, now WE are struggling, trying to pay these prior taxes. ALL BECAUSE HE WAS FILED WRONG. So please make sure you get advice from someone who KNOWS what they are talking about or it could cost you greatly. Good luck!
FIRST... I am no expert. We do, however, own our company and we are an LLC. Raw materials.
Our sales average approximately $300,000/month before expenses, taxes, etc. This year will be around $4 Million.
We opted for no line of credit from a bank and we funded ourselves. Yes, tough but doable if you have good credit, know good suppliers, have experience, heavy personal investment and a good network.
Why? Because when the bank gives you the LOC, they basically "own" your company. We have a colleague who got a business LOC and every quarter, he and his partner have to go to the local bank board, present their numbers for how the quarter performed, present a forecast and business plan for the upcoming quarter. Although they are the ones who know the business inside and out, the bank has final say on their plan because the bank is the one who provided the funding.
Bottom line, be careful of how many people are affiliated with the business regarding loans, expenses, etc.
We manage ours differently... we are sticklers for numbers, forecasting, planning and we have not had any issues at this point going on 4 yrs doing this full time ourselves but have been in the industry 25 yrs.
I suggest you speak with reliable tax and legal counsel so you maximize your benefits for what you want in the end.
Look into Limited Liability corporations. I believe that with those, you get the protections of being incorporated, but you don't pay taxes like a corporation. With a corporation, the corporation pays taxes on the profits. Then, when the profits are divided up among the owners, the owners pay personal income tax on the money so the same money is taxed twice. With an LLC, taxes are only paid once on the profits. Not sure if they're paid by the corporation or through personal income tax. Talk to a professional, but do remember to ask about LLCs.
He should have a consultation with a tax accountant. Many will do that for free.
Talk with a CPA. Different states have different tax laws and have slightly different options for organizing businesses. S corp is a federal designation, some states dont recognize them. You are never too small to get professional advise. An ounce of prevention is worth a pound of cure. I've seen some really small businesses rack up huge legal and accounting expense, all preventable if they had been setup properly with proper systems. Good luck!
You can do what's called an S-Corporation. It protects your personal property (especially anything that has both yours and your husband's names on it) from collection actions if he gets any loans. It doesn't have all the requirements of a full corporation. Make sure he doesn't make himself personally liable for the loans, or if the business goes under, he will lose anything he owns by himself. The corporate status protects his personal property as long as he makes the corporation alone responsible for the loan.
So, yes, it's better in the long run to incorporate. Take it from someone whose house was saved from collections because her husband's business loans for a business that went under were saved by it being incorporated.
Also, he needs a good accountant to explain it all to him. Don't just take my advice or stuff from the internet, you need a professionals help, they are worth their weight in gold.
I am a general contractor, and we are an S-corp. Since we are a small business, this made the most sense for us. Our business profits flow through to our personal bottom line, so we file both personal and business taxes at the same time and are taxed only once on the profits. C-corps are larger (with your sales figures, I don't think C-corp is worth looking into), and are taxed as their own entity, so profits are taxed at the corporate level, and then any owner draw is taxed as the owner's income. I know we were advised against an LLC due to our line of business, but for retail it may make sense. Your best bet is to speak with a CPA and/or attorney about it to determine your best course of action.
We are self-funded right now, with no line of credit from our bank. We hope to keep it that way for the foreseeable future; credit is expensive for small businesses. I would absolutely NOT apply for a business loan unless I were incorporated. If you aren't incorporated and own anything (house, car, retirement account), and default on the business loan, they can and will come after everything you own personally. If you are incorporated and default, they can come after your business assets, but not your personal assets. Obviously, in order to get a loan in the first place though, your business has to have assets... otherwise you may have to co-sign personally on the loan. Definitely consult with your lawyer or CPA for more specific advice.
We used Legalzoom.com to incorporate, and they did a great job for us at an inexpensive rate - if you decide to incorporate.
Years ago I worked for an accountant, in California. Here's what I know:
As a corporation you pay double income taxes. You are taxes on your W-2 income from the company and taxes on the corporation income. If most of the corporate income is also your W-2 income -- you are paying taxes on the same money twice.
I would look up Small Business courses at a local continuing education college or through the Chamber of Commerence --- you may also get some free advice from your accountant or business attorney --- but get them to meet you at your office at the same time, or you may end up more confused than ever. If they have conflicting advice let them sort it out in your presence.
I think he should get listed as an LLC, a Limited Liability Corporation. That means if his business gets sued for any reason whatsoever only the business is at risk. They can't come after his home, his personal belongings, his vehicles, etc....only the business can be sued. If there was a storm and the roof of the business came off and landed in some person's bedroom window they could sue the business but not him personally.
That's the biggest plus for me. Then there is tax breaks. You'll need to talk to a CPA but to me having that business a total separate entity that is an LLC allowed me much more in refunds on my taxes.
His car insurance could be tied to the business too, I had my car insurance sales person do a policy on me when I was the president of the Habitat for Humanity board of directors. To where I had personal liability insurance in case Habitat was sued for some reason. Perhaps someone who thought they had been discriminated against decided to sue the board and the business I could not lose anything that was mine personally.
There are all kinds of good reasons to do this. I truly cannot think of any good reason to not do it.
