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Julie M. Sturgeon: Choosing a business entity in a tough economy

It's Your Money

Posted: June 17, 2009 7:21 p.m.
Updated: June 18, 2009 4:30 a.m.
 

The current condition of the economy and the nation’s unemployment figures give rise to more and more people considering turning their hobbies into viable businesses.

The following factors should be taken into consideration when figuring on which form of business will best serve your purposes:

  • How much of your own personal assets are invested;
  • How much capital you have and the potential for needing outside investors;
  • Your ability to attract those outside investors;
  • Tax and licensing requirements;
  • The time commitment necessary to handle regulations and formalities;
  • The size, scope and type of business you’re starting, including the type of customer;
  • Cost  of incorporation.
If you have capitalized your business using investors and outside capital, the business structure that offers both asset protection and provides a favorable tax environment will be most attractive to those investors. If, however, you don’t need investors or outside capital resources, then you can start small as a sole proprietor and incorporate later as the business grows.

Liability associated with your customer relationships or interactions will impact your potential risk. Some businesses, such as those that rely upon Internet and mail-order sales, operate in an environment with little or no physical contact with the customer.

But other businesses operate of an actual brick-and-mortar store location, where customer foot traffic and potential injuries could result in lawsuits. In the earlier years of the business cycle, many small business owners chose protection from insurance policies rather than go through the time and expense of incorporating.

Attorneys, brokers or medical practitioners offering advice and personal services may run a greater risk of a lawsuit from someone claiming they received bad advice.

It is also assumed that certain professional businesses, such law firms or medical practices, have more assets, making them bigger targets in a litigious society.

Therefore, such a business would more likely choose a business structure that protects its personal assets. Also, those who have already experienced business success — and have significant assets from these previous ventures — would want to protect those assets closely.

How fast you anticipate your business growing is also of concern when selecting your corporate structure.

If you expect it to take several years before you see a profit, you might select an S Corporation, so that as a shareholder, you can offset some of your personal income with losses from the business.

While a sole proprietorship is a favorite choice for many people starting small businesses, some select this method primarily because it provides the easiest way in which to start and open a business quickly. Others become sole proprietors because they think it is too costly or too complicated to incorporate.

Procrastination can come back to haunt a successful entrepreneur. Therefore, it is wise to get some professional advice from both an attorney and an accountant to discuss the details of the business you plan to start or are currently operating. Take into consideration where the business will be in five years, and in 10 years. Also, consider liabilities, taxes, employee benefits and the need for investors before making your decision. Then choose the decision that’s best for your new business from all aspects.

Julie M. Sturgeon is a certified public accountant in Valencia specializing in individual and business tax issues. Her column represents her own views and not necessarily those of The Signal. “It’s Your Money” appears Thursdays and rotates between a handful of the valley’s financial professionals.

 

 

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