Legal Entities – Finding the “Perfect Fit” for Your Business

FeetIn a previous blog post, we discussed the importance of structuring your business as a separate legal entity. Doing so helps protect personal assets from creditors, and it influences the amount you pay in taxes. There are different entity structures; each serves a purpose, and that purpose may or may not align with your business needs. It isn’t always obvious which entity structure best suits your business. While legal counsel can help you determine which entity formation will best complement your business operation, weighing the advantages and disadvantages of each can guide you towards the perfect fit between an LLC and a corporation.

A limited liability company (LLC) has the compositional qualities of a partnership, with the limited liability benefits of a corporation. LLC owners (or members) are only liable to creditors for the amount they individually invest. If you have a small, upstart company, forming an LLC might be the most attractive option, because it offers the most tax flexibility and structural flexibility, and least administrative formalities. First, owners can choose how they wish to be taxed, selecting from different subtypes of LLC’s. They can be taxed as a single-member LLC, where the company will be taxed like a sole proprietorship and not treated as a separate entity. Instead of the company being taxed directly, the IRS will tax based off of the single member’s federal tax return. They can be taxed as a multi-member LLC, in which all involved members choose to be taxed as if they were operating a partnership. Further, members can choose to be taxed as a corporation. In addition to tax flexibility, the eligibility requirements are more relaxed for LLCs, with low start-up costs and minimal paperwork. Paired with less mandated recordkeeping, lower administrative costs are favorable.

Despite these benefits, LLCs are not immune to disadvantages. In fact, most of these disadvantages arise because an LLC’s identity is tied so closely to its members. First, the departure of any member can terminate the LLC, requiring the company to file for LLC status again. For this reason, LLCs are said to have a limited life, unlike more durable corporations, whose existence is not tied to the presence and absence of shareholders. Second, unless members choose to be taxed as a corporation, they will be treated as self-employed, owing Social Security and Medicare taxes to be paid by their share of income.

However, LLCs are not always a sure fit for many companies who prefer the traditional corporation structure. Some benefits of small business incorporation include extensive personal asset protection and a complete legal separation between owner identity and company identity. The costs of operating flexibly can be prohibitive, as an LLC’s entire net income is subject to a hefty self-employment tax. Plus, to maintain its LLC status, an LLC has the (counterintuitively) difficult task of appearing as dissimilar from a corporation as possible. The IRS has listed four characteristics that define a corporation, and prohibits an LLC from possessing more than two. Exceeding two requires the business to refile as a corporation. Corporations are subject to formal obligations, which can be burdensome and often require additional administrative support. However, some of these obligations behoove corporations and help them to keep organized – a department in which many LLCs struggle. Unlike LLCs, corporations mandate that members be assigned specific roles, which can cause some organizational difficulties when it is unclear who has managing power, contracting power, etc.

Corporations tend to be a better fit for larger business, with the exception of S Corporations. Check out our next entry, where we’ll dig into the distinctions between different corporation structures, and see how they align with your business needs.

Bexley Law Firm, LLC
http://www.bexleylawfirm.com

Community Service: Moving towards Exceptional Customer Service

By Brittany Robinett

At first thought, what would you rank to be the most rewarding, yet unsung business skill? Many would argue that it is compassion, which yields greater long-term rewards and customer loyalty than any scheme driven solely by profit. Of course, many minds hear “compassion” and go automatically to customer relations during business hours; however, there is something to be said for serving your customers outside of the workplace. And, by “outside of the workplace,” I mean inside the community.Community

Big or small, every business is part of a community. When it comes to smaller businesses, a greater opportunity exists to build personal ties to a customer base and to present a united front with the locale that it serves. Operating at a local scale often gives small businesses a hands-on advantage at connecting with their customers. People are more likely to show interest in your products and services when you show an interest in what’s important to them – their community, its citizens, and its values.

Volunteering and community participation can give rise to a number of benefits; investing time and efforts can be one of the smartest and cheapest ways to market your business as a truly “local” business, as well as a philanthropic one. Too often, employers forget that customers greatly value company altruism and would rather return to a business that gives back to them and the community that they are serving. Not only does it show that it has those communities’ values at heart, but that it has the people of those communities at heart as well. Outreach programs are a great way to market your business to community members who might not patron your business without knowing a bit more about it, enabling you to build up your reputation in the public eye.

Active volunteer participation helps you to present yourself as a business that contributes not only to the community’s economy, but also to its social fabric. While donations are noteworthy and not to be undervalued, human interactions often leave a more powerful impression than a financial transaction. (Of course, financial contributions can both improve your reputation and increase your eligibility for tax deductions.) It is important for your business to develop an outreach plan tailored to activities that best suit your company. When determining what outreach project best suits your business, whether it’s volunteering monthly at a food bank or running a clothing drive for a local homeless shelter, it is important to consider what the community needs and what you can best provide to serve that need. Naturally, a restaurant owner will likely have an easier time catering an awards ceremony for the Special Olympics than an accountant, whose skills might better situate him to assist with administrative matters. Volunteer activities aren’t one-size-fits-all; no need to stretch yourself in a direction you are not skilled or prepared to handle. However, you should aim to deliver community service of the same quality and caliber as the customer service your business prides itself on.

In addition to improving your reputation and connections within the community, participating in community outreach projects can help boost employee morale. Studies have shown that when companies regularly involve their employees in community service projects, many employers witness increases in job satisfaction, employee retention, employee morale, and workplace camaraderie. Creating an atmosphere of community concern within the workplace can be simultaneously rewarding on both a personal and professional level. Add the cost-saving benefits it provides, and you can only ask why you wouldn’t work towards it.

(Note: You shouldn’t be afraid to flaunt your philanthropy. You wouldn’t keep quiet the excellence of your product, the exceptional customer service you have to offer, or the superiority of your brand: Why would you silence the values of your company that you’ve expressed through community involvement? Let your business reflect its values; if community activism belongs in that value pool, let it shine.)

Face it – good energy is contagious. When that good energy is associated with the services you offer, people will be more and more compelled to take advantage of those services. If the New Radicals had it right, you get what you give. Give big.

Bexley Law Firm, LLC
http://www.bexleylawfirm.com

About the Author:  Brittany Robinett is a third year law student at the Georgia State University College of Law.

 

Estate Planning: Safeguarding Your Business when Hindsight Is Not an Option

By Brittany Robinett

“What would you do to protect your loved ones?”  For most people, the instinctual response is “anything.”

Hourglass

It should follow that those individuals would plan to protect their families in case something unfortunate, such as terminal illness or death, befell them.  Statistics, however, speak to the contrary.  A recent poll revealed that too few Americans – a maximum of 50% – have wills in place.  Even fewer have arranged a living will or power of attorney to carry out their wishes in the event of incapacitation.  Perhaps such inaction stems from the misconception that wills are for the wealthy or from fear of thinking about the unpredictable end.  Regardless of social status, however, surprises are rarely welcomed by the survivors left to pick up the pieces.

Suppose I instead asked, “What would you do to protect your business?”  It seems to escape many small business owners that their personal estate includes, in fact, their business, and it is in their best interest to establish a plan for it to continue in their absence.  For both emotional and financial reasons, owners often resist relinquishing control; yet transfer of ownership, like death, is inevitable.  Planning for the future not only eliminates stress on the bereaved, but it is also cost-effective.

Consider some consequences that could arise if your business’s affairs were not in order.  If death or illness struck, could family members and co-owners tie up loose ends?  Would someone be familiar with all associated accounts, know how to run the business, and manage it accordingly?  How would the IRS value and tax your estate’s assets?  Would the estate be left to probate and at what expense to your loved ones?  When you weigh the risks, why wouldn’t you plan ahead?

Every business structure is unique, and the steps necessary to protect each differ.  Additionally, the personal interests of owners influence those steps.  Legal counsel can evaluate these concerns and advise the best course of action for a business to take.  While plans may differ, there are certain safeguards that all small business owners should consider adopting: a living will, a power of attorney, and a trust.

1)     A living will documents an individual’s healthcare wishes in the event of incapacitation.  Living wills ensure that these wishes will be carried out, even if the person cannot express them.

2)     Two types of power of attorney are recommended for business owners: a healthcare power of attorney and a durable financial power of attorney.  A healthcare power of attorney is a document appointing an individual to make healthcare decisions fulfilling the wishes of the incapacitated.  For various reasons, an owner might not want a person with healthcare power of attorney to have additional financial control.  Since incapacitated persons cannot legally contract, a financial power of attorney appoints someone to handle your financial affairs and run the business within the scope of your instruction.  Financial POAs may handle anything from paying bills, to handling paperwork, to managing the business in your absence.

3)     A trust permits an owner to transfer property with others while retaining some management authority and ability to recover income and benefits.  Since the trust owns your assets, there is no fear of them going into probate.  Essentially, it allows a business to run in your absence while freeing it from any personal debts and obligations upon death.

In the words of Lieutenant General Claude Christianson, “Your biggest enemy is the unknown and assumptions.”  Don’t be your own worst enemy.  Plan for today so that the fruits of your labor can be enjoyed tomorrow.  Those you leave behind will surely thank you for it.

Bexley Law Firm, LLC
http://www.bexleylawfirm.com

About the Author:  Brittany Robinett is a second year law student at the Georgia State University College of Law.

Office Depot and Paperless Transactions

This post will be about how an office supply megastore can provide inspiration to small businesses.

But first, a story.  The Hero of this story is about a young attorney working for the United States Department of Labor. The Hero is performing heroic acts of heroism by ensuring America’s workers are able to work in safe environments and are able to come back home to their families with all the arms, legs, and heads still attached.  Hardworking mothers and fathers across the country loved the U.S. Department of Labor, even if they didn’ t know why. However, deep in the Haunted Swamp known as “Dee Cee,” a twisted cabal of warlocks and witches conspired to ruin America. The witches and warlocks argued and fought each other and through their loathsome scheming, they created a foul beast known as “Sequester” to ravage the countryside. Long story short, the Hero will lose his job and he decided to start his own firm and needed to become a notary because it’s a pain in the neck to find one on short notice.

So the Hero — that is, I — took my business to Office Depot. When you become a notary, the county only gives you a certificate for your license, but nothing else really (other than information). So, to get the actual seal, you have to go to an office supply store and they’ll produce a seal for you.  What is cool about Office Depot, and the belabored point of this blog post, is their receipt system.

Office Depot’s “Green” store in Austin, Texas.

(Photo credit: Wikipedia)

Full disclosure: I hate receipts. Seriously. I find holding onto scraps of paper for some phantom, future purpose is mind numbing. I know, I know, you need them in case you have to return something or for deductions.  But think about how many receipts you get on a consistent basis that you don’t really need.  These are wastes of paper, resources, and create clutter. But at Office Depot, you are given  three options: paper receipt, paper receipt and emailed receipt, or just email the receipt. I always choose the third option.

The paperless receipt option fits very well into my business model. Attorneys are notorious for being wasteful with office resources, such as paper, copies, etc. This wastefulness creates a great disservice to the client because it increases overhead costs, costs that ultimately get passed along to the client. Under the paperless model, an office reduces its operating costs by minimizing the amount of paper and ink. The Bexley Law Firm encourages not only law firms, but also small businesses, to think about the amount of resources used and how those resources will affect their bottom line. This is not to say, of course, that a business should not keep records. Proper recordkeeping is essential to having a litigation-resistant business.

In the next few blog posts, I’ll speak more about my philosophy on paperless recordkeeping and what it means to have a “litigation-resistent office.”

Robert S. Bexley, Attorney
Bexley Law Firm, LLC
http://www.bexleylawfirm.com