Choose the right business entity
For most small businesses, LLCs are best because you have more tax options and less formal requirements. You also have more freedom within your operating agreement to design the business structure that you want based on the needs of the business.
Do the Formal Stuff
Depending on the structure that you chose, your business can be a separate entity with its own Employer Identification Number (“EIN”) or it can be an extention of the owner, such as a sole proprietorship. It is important to think carefully about what business structure is best for your business by looking at how the entity will be taxed, how the income and expenses are reported, and the business’s liability exposure. Some corporate structures offer much more protection to the owners than others. For example, a sole proprietorship provides very little protection if the business was sued. In contrast, a corporation or an S corporation offers much more protection. The type of business structure chosen also determines what type of documentation the business is required to keep. For example, a sole proprietorship is not required to keep corporate meeting minutes and is not required to have corporate resolutions. The risk with an informal structure such as a sole proprietorship is that the owner may be personally liable for the actions of the business and its employees. A more formal business structure will provide additional protection to the owner.
Do not co-mingle business and personal finances
A business should have a company credit card and a bank account titled in the name of the business. Use personal bank accounts and credit cards only for personal expenses.
As an LLC or corporation, you (as the owner) are not personally liable for company debts or lawsuits. Unless you sign a document such as contract in your name instead of the business.
Choose an accountant and accounting software carefully.
Ensuring your business thrives is a concern for any business owner. Choose an accountant who is familiar with business tax issues. One of the areas that frequently causes business owners issues is calculating self-employment and/or payroll taxes correctly. Mistakes in this area can be very costly in terms of IRS penalties and attorney fees.
Do not sign away your protection
As an LLC or corporation, you (as the owner) are not personally liable for company debts or lawsuits. Unless you sign a document such as contract in your name instead of the business. When acting as the owner for your business, sign as your business, e.g., John Milton, CEO of Hotter than Hades HVAC, LLC. This demonstrates your inten to bind the business, rather than yourself. If the contract said John Milton, instead of John Milton, CEO of Hotter than Hades HVAC, LLC, the CEO may be personally liable instead of Hotter than Hades, LLC.
Seek legal counsel when needed
If you run into a situation such as a lawsuit is filed against the business, an employee is injured, or a contract dispute arises, seek the advice of an attorney familiar with business litigation issues.
About The Author
Kitty Cone is member of the Arkansas Bar Association, Arkansas Trial Lawyer’s Association, and a Blackstone Legal Fellow. Kitty served as a State Trooper in Faulkner County, where she now lives with her two children.