Whats the best way to structure my business?

The most popular choices for organizing small businesses are: a limited liability company ("LLC"), a subchapter S corporation (“S corp”) or a sole proprietorship. Determining which one is best involves several liability, tax and recordkeeping factors. Both LLCs and S corps can limit owner liability so that a business creditor usually can’t go after the owner’s personal assets. S corps offer tax savings for business owners that are not typically available to LLC owners, but S corps also have more stringent recordkeeping requirements. Both LLCs and S corps have ongoing tax preparation and legal expenses. A sole proprietorship is cheap and easy, but offers no liability protection.

One size doesn’t fit all. If you are starting a business or thinking about changing to a different entity, consult with your business attorney as well as a CPA who works with small businesses.

Should I use independent contractors or employees?

Small businesses often use independent contractors to avoid payroll taxes and other costs of hiring an employee. Using independent contractors offers flexibility with fluctuating workloads. In addition, independent contractors don’t have the same rights as employees so businesses can reduce potential liability. Drawbacks to using independent contractors include less control over workers. Furthermore, independent contractors are free to work elsewhere, so lack of exclusivity and continuity in staffing can be problematic. Perhaps the biggest concern about independent contractors is the potential for a payroll audit. State and federal agencies -- particularly the IRS -- want to see workers classified as employees. The reason is simple: when workers are classified as employees, their payroll taxes increases government revenue. It’s also harder for payroll employees to underreport or hide income.

Consult with your business attorney about whether to use an independent contractor or an employee. Regardless, it’s advisable to use written employment agreements or independent contractor agreements to define expectations on both sides at the beginning of the relationship.

How do I get my customers to pay on time?

One way to reduce the risk of late payments is to pre-qualify customers through a credit application process by checking credit history and getting references. If the customer has a problem paying bills you may decide not to do business with them, or get payment in advance. If the customer is a business entity, you may want the owner to personally guarantee the account. That lets you pursue a claim against the owner directly if the business doesn’t pay.

Another tactic is to use incentives, such as a prompt payment discount. You also can discourage slow payment by including late fees, interest charges, and the right to stop work until the balance is paid.

Whats wrong with 50/50 business partnerships?

Many two-owner businesses start out as equal partners to avoid potential conflict. But no matter how compatible two people may be, they will not agree on everything. And if one of those disagreements involves a major decision, such as whether to bring in new investors, take on a new marketing territory, or sell the company, an equal partnership can mean a permanent deadlock leading to a shutdown of the business.

Working out a solution ahead of time can mean the difference between success and failure. One option is to determine the value of each partner’s contributions to decide on an unequal ownership split. If the business is structured as an LLC, it is possible to draft the governing documents to permit partners to share profits and losses equally but have unequal voting power on key decisions.

This site is designed for general informational purposes only. The information contained in this site is not intended to be, and should not be construed as, legal advice, or the creation of an attorney/client relationship. An attorney/client relationship may only occur with the express written consent of James M. Hillas, P.C.