Small business is often defined as a business, corporation, partnership or sole proprietorship which has less than five employees and lower than $5 million in annual revenue. The definition of “small” for a business in terms of qualifying for government assistance and qualify for preferred tax status varies greatly by industry and country. One thing that all businesses have in common, no matter what size they are, is the need for business owners to protect their business assets.
Small businesses, like mom and pop stores, also need ways to protect themselves from loss. If your business is a small business, you may want to think about starting an LLC, Limited Liability Company, or Corporation. These states require much less paperwork when incorporating than most other states. You may even qualify to file as an S corporation instead of an LLC.
If you are small business owners and you notice that your business assets are quickly becoming illiquidity you may want to consider incorporating. Many new and small business owners do not see related entity protection as important as ownership. An LLC will protect you against creditors or hostile third parties that want to take control of your business, assets, or company. An LLC is in most ways similar to a corporation, but only has limited liability and is not publicly traded like a corporation.
Strategic planning for small businesses often involves using limited liability companies and corporations. Both are very useful for strategic planning purposes as they shield you and your business assets from events beyond your control. Many small businesses that incorporate do not actually need any protective cover as they do not generate significant outside credit. Some small businesses have the ability to generate credit by using their own internal funds in order to finance growth and marketing expenditures.
Even though there are similarities between large and small businesses, there are also key differences. While some small businesses make do with a small amount of venture capital, many large businesses are powered by venture capital. There is another level of venture capital available to very large corporations that is rarely available to small businesses. If you are a small business owner and you need venture capital, you probably should not bother going through the expense of forming an LLC as this could hurt your capital structure. The IRS does not recognize an LLC as being a separate entity and if you are able to obtain seed money then you can incorporate as a C corporation or for most business owners a sole proprietorship.
When you incorporate as a small business, you can usually deduct a lot of business expenses because of the simple fact that the IRS requires that all U.S. residents use some type of Form(e) for business use. For example, a sole proprietorship cannot deduct expenses for advertising under the first line of your personal income statement because you are not considered to be doing business as a sole proprietor. Also, an LLC can deduct expenses related to its federal tax return, but you will lose deductions on the state and local taxes if you are not a resident of the state. An S corporation cannot deduct income tax, however it can be deducted as an exemption on its federal income tax return for its corporate business activities.
There are many reasons why small businesses fail. Many small businesses start with small capital and spend several years paying off their debt. Other small businesses start out with great capital but no employees to pay the bills. Then there are others that just don’t work hard enough to break even. Any of these situations can be avoided if you play your cards right.
One of the best things you can do for your small business is to hire someone who is certified in tax law so you have someone who knows what he is talking about. If you own a small business you should keep in mind that your small business is probably going to have more regulations than other businesses. These regulations often come from the government, so you need an expert on the laws in your state. The S corporation and the sole proprietor designation are just two of the options you have available to you in order to stay within the size standards that the United States government has set.