Category Archives: Legal Entity

Should I take on a business partner?

Are two heads always better than one?

When it comes to taking on a partner to start or grow a small business, there’s no right or wrong answer. 

Partners can complement each other’s management skills and bring benefits such as special expertise and client relationships. 

As with any relationship, there are trade-offs that must be carefully considered before deciding whether adding a partner is a wise move, and then you have to find the right person for the role.

If it sounds a bit like marriage, you’re not far off. Having the right partner can be a terrific advantage for a business. Making the partnership successful takes as much energy, effort, and positive feelings for one another as it does to make a marriage work.

There are several important things to consider before choosing a partner and entering into a business partnership.

Define your objectives. From the beginning, the partners need to be certain they share the same personal and financial goals and have comparable expectations for what the partnership will accomplish.

Define your roles. Each partner’s roles and responsibilities should supplement and enhance other’s, but not overlap. In other words, don’t get in each other’s way. Respect each other’s skills and abilities, but do your own job.

Share financial obligations and rewards. Be clear with each other about your financial obligations and how the rewards (i.e., the profit and owners’ equity) from the partnership will be shared. 

Sign a written partnership agreement. This is absolutely essential. Every partnership should be based on a well-written partnership agreement, prepared by an attorney with a great deal of experience in business law. It will be worth every dollar you spend to have it prepared. 

Share decision-making. Partners need to agree on all major decisions affecting the business, particularly those involving large investments of capital, changes in strategic focus, key management hires, and more. Decide in advance how you will make these decisions and know you will benefit by having more than one perspective. 

Understand that unhappiness happens. Any relationship between two people is bound to produce a bit  of friction and sometimes anger. More often than not, they are caused by miscommunication or misunderstanding. The sooner they are brought out in the open and discussed, the less likely they will lead to a major “blow-up.”

Provide an “escape hatch.” Every good partnership agreement contains a “buy/sell” provision in case the partnership doesn’t work out, or one of the partners needs to withdraw from the business for any reason. 

When there are disagreements, knowing the consequences of not reaching an agreement is often all it takes to help partners find a reasonable compromise.

My first business was a 4-way partnership that included an Angel investor. Before the investor wrote his check, and the four of us got down to business, we hired an experienced business attorney to write our partnership agreement. He asked a lot of questions and we talked among ourselves until we had the answers. 

We agreed on our roles, our financial obligations and potential rewards. When the time came to dissolve the partnership, everything we had to do was right there in the agreement. 

If you would like to meet with an experienced business person who has volunteered his or her time to help people like you, reach out to a SCORE mentor today! SCORE’s mentoring services are free.

Sole Proprietor vs. Single-member LLC

man in front of a startup sign

New entrepreneurs have a long list of to-dos when starting their businesses. Among the tasks to check off that list is deciding their business structure. For small businesses with a sole owner and no (or very few) employees, the two most popular options are:

  • Sole proprietorship
  • Single-member LLC (Limited Liability Company)

So, which one might be the best choice for your business?

I advise you to consider talking with an attorney and accountant to dig into the advantages and disadvantages of each for your specific situation.

In the meantime, let’s take a look at some of the basic characteristics of each so that you’ll have some fundamental information as you start your research. Continue reading

4 Tips for Adding a Partner to Your Business

handshakeFinding and adding a business partner to an existing company is about more than going into business with a friend or family member. How you add a partner typically hinges on your business entity. Depending on how you incorporated your business, entrepreneurs will need to conduct a bit of due diligence in order to properly bring on a business partner.

From an LLC to a general partnership, let’s break down what you need to do now to prepare to add a partner to your business. Continue reading

Steps For Starting a Nonprofit Business

Starting a business with a cause offers much satisfaction as you work to make lives better for others. To launch a nonprofit corporation, it requires taking many of the same steps a for-profit corporation or LLC does, but there are differences, too. Nonprofits must comply with some requirements that don’t affect other businesses.  

So, where do you begin? 

1. Understand what it means to be a nonprofit.

A nonprofit may be created a nonprofit for charitable, educational or certain other purposes—as long as they don’t directly benefit the owner. Nonprofits (if approved by the federal government) operate tax-free, and they can accept donations and apply for grants.

While a nonprofit business can make profits, surpluses must be used toward fulfilling the organization’s objectives—such as buying computer software to run the business more efficiently or investing in resources that deliver value to those that it serves.  Continue reading

Business Structure: Which works best for you?

business ownershipWhen you start a new business, one of the first decisions you’ll have to make is how to structure your company. This choice can be critical to the future health of your business. Taking time up front to consider the pros and cons of each possible structure will likely save you many headaches in the future. In certain cases, it can mean the difference between your business’s success or failure.

Below you’ll find the upsides and downsides to some common business structures: Sole Proprietorships, LLCs, C-corporations, and S-corporations.

Sole Proprietorship

Upside:

  • Easy to Form – Sole Proprietorships are the easiest, most common, and least expensive business structure. A person is essentially a walking, talking sole proprietorship in waiting. All you need to do is sell something—a product, a service, anything—and boom … suddenly you’re a sole proprietor. Aside from obtaining any required business licenses, a Sole Proprietorship requires no paperwork and no filing fees.
  • Decision Making – As suggested by the name, you are the sole decision-maker. You run your business the way you want to run your business, and you don’t have to ask permission from anybody.
  • Taxes – The IRS doesn’t view your Sole Proprietorship as a separate tax entity, so there’s no special or additional tax paperwork. You’ll simply file your taxes on the same 1040 form as any other individual.

Downside:

  • Liability – The lack of separation between you and your business leaves you liable for all debts and legal claims against the business. You can even be responsible for your employees’ actions (if you have employees) while they are on the job.
  • Funding – Sole Proprietorships lack a specific structure for raising funds. You have no stock to sell, no set percentages to offer, and banks are often reluctant to offer loans to sole proprietors. Continue reading

Ready to start an online store?

With all the news about people making a ton of money online, many aspiring entrepreneurs are excited at the prospect of starting an ecommerce store. However, many people don’t think through all the things that they need to consider before they even start the process of building an ecommerce site.

Here are eight things to consider before starting an online store.

1. What Products Are You Going to Sell?

One of the most important decisions is determining which products you will sell on your online store. Your best bet is to start small – with a few select products that are based around a specific niche, i.e. breastfeeding products, scuba diving gear, hiking products, travel gadgets, hemp products, etc. Start with a handful of products in that niche – you can always add more products to your store as you grow. Check out your competition and see who you’re up against.

Be sure to pick a niche that you’re personally interested in. If you’re not interested in what you’re selling, you will quickly lose your passion.

Also, look for unique products that can’t be bought at Target, Walmart or other big brand stores — you will never be able to compete with them on price or promotion.

For instance, when I had an ecommerce site, I searched for mom- or parent-invented products that weren’t available through mass market stores. Plus, these types of product manufacturers are typically more willing to work with you on terms and drop shipping (which we will talk about in a little bit.) You can also look for innovative products to sell on crowdfunding sources like Indiegogo or Kickstarter.

When you determine which niche products you’re going to sell, see if there are industry associations, trade websites or magazines. If so, join, follow and subscribe. Also, if there are product tradeshows around your product niche, attend these trade shows to discover new products, speak with the manufacturer reps directly and learn more about the industry in general. Often at the tradeshows you will be able to negotiate better pricing or drop shipping arrangements – especially if the manufacturer is launching a new product and they’re looking for new distributors.  Continue reading

Ask SCORE: How are pass-through entities affected by the Tax Cuts and Jobs Act?

2018 tax lawsThe passage of the Tax Cuts and Jobs Act (TCJA) brought renewed focus upon pass-through entities (PTEs). In spite of their widespread popularity, PTEs are commonly misunderstood. While thought of primarily as small businesses with few employees that generate a fraction of overall business profits, the truth about PTEs tells a very different story.

As it turns out, pass-through entities are the most popular structure in the US, employing millions of workers and churning out billions of dollars in annual revenues.

This article will demystify many of the misconceptions about PTEs and explain how the TCJA will affect these companies—and the US economy—in the future.  Continue reading

Is it time to change your business structure?

The process to change a business structure (for example, change from a sole proprietorship to a corporation) is the same as starting a new business.

Use the Business Licensing Wizard to get information and links that will help you do the following:

  1. Create your business structure with the Washington Secretary of State. (Skip this step if you are changing to a sole proprietor or general partnership.)
  2. Submit a new Business License Application to apply for a new Business License. You will be given a new Unified Business Identifier (UBI) number to be used on tax returns and other documents.
  3. Reapply for any applicable specialty, and/or city endorsements (for example, Nursery endorsements).

Note: You will probably need to re-apply for all of the licenses you currently have. For example, if you are a building contractor, you will need to reapply for your contractor’s license with the Department of Labor and Industries.


This information has been borrowed from the Washington State Business Licensing Service website. (link)

LLCs for Freelancers: Understanding Liability Protection

Nearly every professional freelancer eventually faces the question of whether to remain a sole proprietor or form an LLC. The question becomes more taxing as business grows and the potential for liability increases.

As a freelancer, you may have heard that forming an LLC provides liability protection. While this is true, it is not an impenetrable shield.

Understanding how liability works is crucial for protecting you and your freelance business.

The most important difference between a sole proprietorship and an LLC is that the limited liability company is a legal entity separate from you, the freelancer. If your LLC is sued while pursuing its business, the company’s assets are at risk, but your personal assets are not.  Continue reading