Protecting Assets from Business Liability

Protecting Personal Assets from Business Liability

 

It’s time to discuss business liability.  The conversation up to now has been on the general consequences of operating as a sole proprietor or a partnership. 

 

A constant concern for a business owner is the impact of a formal complaint or lawsuit. Being self-employed may put a business owner in a precarious position in terms of protecting personal property.  In a self-employed (including partnership) situation all revenue and obligations flow directly to the self-employed business owner. Unless legal steps are taken to protect personal assets from business challenges, personal assets can be encumbered or lost in a liability dispute.

 

A small business owner can protect personal property from the consequences of liability by becoming a Limited Liability Corporation (LLC) or a regular corporation. The specific formalities of each legal form must be followed to obtain the protection sought for personal assets of a business owner.  To maximize the desired liability protection an attorney and/or accountant should be consulted to determine the best strategy to use for the specific situation.

 

A LLC provides the most flexibility for a sole proprietor. The use of a LLC allows the business owner to retain the advantages of direct taxation to the owner. This means business revenues are taxed just once. Another way to express the tax process for a sole proprietor or partnership is as a pass-through tax. As a LLC this tax process is intact and personal property is usually cordoned off from exposure to business liabilities.

 

Many small business owners avoid the incorporation step given the impact of double taxation on revenue, first to the business and then to the business owner.  In a corporation the owner is considered an employee of the corporation. As such, personal property is usually protected from any business liability. The corporation is presumed responsible for any business liabilities.

 

There are other methods of protecting personal property from business liability.  One way that has nothing to do with the legal form of the business is to have all personal property owned by a person not connected with the business.  This limits claims of business liability to property owned by the business.

 

Many sole proprietors consider incorporation as the business grows.  A sound business reviews all options annually to ensure the best legal strategies are in place at all times.

 

(This article is not a complete view of possible tax consequences for each form of incorporation. A tax attorney or accountant should be consulted before any legal business form is determined.)

 

C Moynihan     May, 2013

 

Epilepsy Awareness

This past weekend I participated in a walk-a-thon fundraiser for the National Epilepsy Foundation at Forest Park in Springfield.  It was a beautiful day and the turnout was tremendous given it was the first walk for epilepsy in this area.  There were many teams of people who were walking on behalf of someone close to them.  I walked for my sister, Mary, with my mother, father and a friend of the family’s who struggles with epilepsy herself.  Our group was named Mary’s Marauders in honor of my sister though we also walked for our friend, Nicole, the you young lady who walked along with us.

Epilepsy itself goes unnoticed unless an individual has a seizure in front of other people.  It comes in many forms from petite mal to grand mal with many types in between.  It is estimated that 130,000 people live with epilepsy in just four northeastern states alone.  Research for this condition is underfunded, which is why we walk.  All around the country fundraisers are held in an attempt to educate people as well as to gain the monies needed to promote further research.  Many people are completely unaware of the nature of this condition and it is up to those who have the knowledge to spread it to the masses.  As I said previously it is a silent disability, one that no one knows about just by looking at a person.  Perhaps this is why research is limited.

I’d like to invite all who read this to further educate themselves about epilepsy.  It is quite possible that we all know someone living with it.  It so frequently goes unnoticed that people tend to forget that it is out there affecting people in their every day lives.  For many with epilepsy life becomes limited due to seizures brought on by flashing or florescent lights, or just by the nature of the condition.  Epilepsy might be unseen but it is there. Please log on to your computers or talk with someone who has extensive knowledge and find out more about it. 

Business partnership concerns….

Partnerships- The Devil IS in the details!

 

You and your friend have been working together off and on as yard maintenance and handyman services.  This “partnership” started in school as a means of getting spending money.  With limited employment opportunities, the two of you have developed some steady customers on an “informal” basis for almost 5 years.  You both own vehicles used for the business.  You each own tools and equipment necessary for the work. 

 

With growing personal responsibilities comes the need to create steady income. The situation has grown into a business that allows the two of you to work, year round, with a reliable income every week.  Is a partnership, based on yard maintenance and handyman services, the opportunity it seems? 

 

Individuals in similar situations would see this as the answer and move ahead. The challenge is obtaining more customers. This means marketing your services to a broader audience over a bigger territory.  Up to now customers have been family and friends.

 

• How is this to be done?  Who is responsible for selling services? How are the services coordinated? 
• Who is responsible for the paper work? How are profits divided?  What happens as staff is hired? 
• Is liability insurance another expense that must be considered? 
• What happens if one of the partners is injured and unable to work?  Does this person still get paid?
• What happens if employees are injured?
• How are income and taxes distributed?
• What is the role of a spouse or other family members with special skills?

 

This list is the tip of the iceberg. Many times these questions are not discussed when the partnership starts leaving the answer for when a problem arises.  This is the worst time to develop a solution. The time to seek the advice of a business Attorney is when the business starts or a soon as possible.

 

The above questions and those related to full disability or death of a partner should be resolved BEFORE a partnership moves forward as a business. Partnership agreements should be in writing, reviewed by an attorney and notarized. The partnership agreement usually sets ownership on a %.   An Accountant assures profit, taxes and other activities are handled appropriately.  Business insurance, always a good idea, is almost mandatory in a partnership situation.  A funded Buy-Sell Agreement is a key document for the partnership to have in place.

 

Is your partnership agreement in writing and up to date?  An annual review is an important business activity.  Things change. What happens to your family and your share of the business when you die or are disabled?  Are the answers in your partnership agreement?

 

Contact BDC@neabworks.com for more information.

 

Colleen Moynihan

2013

Tax TIme is Here

It Is Taxing – But Necessary

 April 15^th, the drop dead filing day for most income generating entities, is fast approaching.  The self employed individual, whether a sole proprietor, partner, or incorporated entity, should view this annual exercise as a review of their business plan outcomes. 

 This blog looks at the IRS Schedule C, the attachment that must accompany a completed 1040. It is important to note there are 2 steps in deducting operating costs to determine taxable income.  It may help to review some terminology. 

• Gross receipts or sales = the monies received from all items or services sold last year before any business bills are paid.
• Gross profit = the money left AFTER the cost of all materials needed to make the product or service sold are deducted from gross receipts. 
• Gross Income = gross profit and all revenue from other sources. This is the number from which remaining operating costs are deducted to determine taxable income.

 First Deduction                       Calculating Gross Profits

The business owner totals the value of prior inventory at the beginning of business year plus the cost of materials and labor to determine the total cost of goods (cogs)sold.  The total of COGS is deducted from gross sales/receipts to establish gross profits.

 Second Deduction                  Calculating Gross Income

Once gross profit is determined, the remaining operating costs are deducted to determine taxable income.  This step includes all other allowable deductions.

 The use of an Accountant to complete a business tax return is recommended to maximize allowable deductions. The tax code changes every year and subtle changes in deductions can mean increased deductions.  An Accountant is best prepared to know what and how to get all allowable tax deductions.  The allowable deductions for vehicles and in home offices are best determined by an Accountant. The services of an Accountant to complete a tax return are fully deductible.

 The Internal Revenue Service (IRS) does allow the avoidance of taxes.  It is the evasion of taxes that is a criminal offence.  As to the benefits of filing a tax return, this is a tool to document earned income, the basis of calculating all Social Security benefits for disability and retirement.  The higher the documented income is the higher the Social Security benefit.  Being paid under the table is an excellent way to lose or limit any potential Social Security benefit.  It is also an evasion of taxes.

 

C Moynihan

NEw England Business Associates Business Development Center

The Sole Proprietor’s Dilemma

The Sole Proprietor’s Dilemma

The biggest dilemma a sole proprietor faces is developing a regular income in the early years of the business. The primary reason is the limited amount of gross revenues to pay for operating costs.  This usually leaves little for net income to the business owner.  To better understand the basis of this dilemma, think of the business as a large funnel.

Revenue from all sales is collected. Revenue dollars pay business debts BEFORE salary paid to the business owner.  Dollars left AFTER all business costs are paid are taxable income to the business owner.

Many sole proprietors confuse the revenue coming to the business as having an immediate % payable to the sole proprietor as personal income or salary.  Salary to a sole proprietor is NOT a tax deductible cost to the business.

Salaries, FICA and benefits ARE business deductions, but only for employees. When a business starts paying employee salaries hiring an Accountant is recommended.  This is a tax deductible business expense.

When starting a business, the desired owner income should be included when projecting bottom line outcomes to determine the sales level needed to provide adequate net income.  Remember, this is the money left AFTER business costs are paid.

Picking the legal form for defining your business.

January 2013    What legal business form is right for your business?

 Every self employed individual must decide at some point as to a specific form of doing business.  Over the next twelve months we will discuss the various business forms available under the law and what each form can or cannot do for an owner.  Incidentally, the United States has a vibrant entrepreneurial landscape because business must operate under “the principle of law”.  This concept of “principle of law” is not available in many economies around the globe.  

 For most new business owners the answer seems straight forward, “I will own my own business”. But that fails to tell the complete story.  The business owner can select from many options for the legal form of business operation. Over the life of the business the owner may actually change the form of the business several times.

 Many business owners are a for profit business. That is the more understood and desired category of doing business.  The other category is not for profit.  Many individuals believe these businesses, and they are a business, lose money hence the not for profit category.  It is also assumed that a not for profit is a charity working to help others. While this is often the case, this is NOT what makes for a not for profit business.  Being a for profit or not for profit is tied to the intent of the business owner.

 Intent:  make all the decisions; grow the business and sell at a profit; pass the business to heirs upon death; use the business to fund retirement; educate individuals in the basics of a topic; do research and develop policy.  These are examples of intent for a business.  Some of these “intents” only apply to a for profit business.  Some of these intents qualify for tax benefits, some provide for a different array of benefits.

 The person(s) starting a business must understand the tax  impact of these intents to assure they are selecting the best form of business structure for their intent long term.

 The next twelve months will look at the various legal forms  available to a business, the tax implications of each and what additional considerations must be made when deciding on a business form.  One blog will focus on not for profits and when that business form might be appropriate.  The legal status of the business owner will be defined by the type of legal business form selected.

 Do you have a question about how to choose your legal business form?  Look first at what your intent is for the business long term……let’s talk.

Film Festival

On February 4th, 2013 NEBA, in conjunction with Reel Abilities, will be hosting a disability related Film Festival. It will take place at the Scibelli Enterprise Center across the street from Springfield Technical Community College.  The event will begin at 6:00 with a half hour of networking and light refreshments followed by the viewing of three short films.  At the end there will be a period for questions and answers based upon the movies.

The films cover a range of topics.  The first demonstrates the relationship between a young man who uses a wheelchair and his able bodied friend.  The second film chronicles the life of a man recovering from a stroke.  The final film shows a triangular love story involving a young man who is blind.

The Film Festival will be the first in NEBA’s history.  It’s uncharted territory for us and will be an exciting new endeavor.  The room that we will be using only seats forty so we are asking people to R.S.V.P. to Bridgid Preston at (413)821-9200 ext. 129 or bridgid.preston@nebaworks .com

We hope to see a full room the evening of the 4th.  Please spread the word to as many people as you can.  We are looking forward to a great event!