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FAQs - Business Transactions

This is a critical question for any business. There are many forms to choose from including sole proprietorships, partnerships, limited liability companies (LLCs) and corporations. Each type of entity has a different set of rules regarding taxation, owner liability, distribution of profits, asset protection, documentation and more. We will review the options with you and recommend the best entity for your business.

Sole proprietorships are run by a self-employed person who has not organized his or her business into a formal business entity.

Partnerships are formal or informal agreements to work cooperatively and share the profits and losses from the business. Partnerships can be general partnerships in which all the parties share in the profits and losses and are liable for the acts of the business. Partnerships can also be limited partnerships in which one or more partners contribute capital to the partnership and share in a percentage of the income (and perhaps losses) but do not take an active role in the partnership's activities.

Corporations are formally organized business entities. Organizers of the corporation must comply with state laws and regulations to begin and maintain the corporation. The corporation is usually governed by a board of directors and corporate officers. Shareholders can participate in the profits and losses of the corporation by buying shares in the corporation. The corporation is considered a separate legal entity from its directors, officers and shareholders and has perpetual existence.

Limited liability companies, also known as LLCs, are organized to offer limited liability for their members. As long as the members comply with the rules governing LLCs, the members will not be liable for the LLC's debts and obligations. As with a corporation, an LLC is a formally organized business entity. Like corporations, LLCs must file documents with a state agency to maintain their status. LLCs can offer greater flexibility to its members than a corporation.

Many entrepreneurs balk at the idea of drawing up a business plan, preferring to get elbow-deep in their businesses rather than consider the potential and risks of their ideas. But many, if not most, businesses would benefit from the serious consideration and planning that are required to draft a business plan. Besides this advanced planning, businesses also gain a valuable tool to present to lenders, investors and interested third parties to obtain financing or other backing.

A business plan is a formal document that includes information on the business's products or services, the financials, a marketing analysis, the business owners and management and any funding requests, along with other information that interested parties may find helpful. Because of its comprehensive details on the business and its products or services, the business owner will want to control access to the plan.

Drafting a business plan takes time and effort, but business owners can optimize business potential by carefully considering the elements of the business plan. As the business grows, the business plan can serve as a reference for professional contacts and a future road map for growth and development. An experienced business attorney can assist a business owner to draft a formal business plan.

Many employers use independent contractors to carry out essential aspects of their businesses. Independent contractors enjoy the freedom of self-employment as they perform freelance work for various companies. But who is considered an independent contractor and what implications does that have? The term "independent contractor" has its primary implications in the tax arena. An independent contractor works for a business and performs distinct tasks for the employer.

A person is considered an independent contractor if he or she meets the following criteria:

  1. the person possesses or has applied for a Federal EIN or SSN or in the alternative has agreed in writing to carry out the responsibilities imposed on employers;
  2. the person has control and discretion over the means and manner of performance of the work in achieving the result of the work;
  3. the person has control and discretion over the time when the work is performed, and the time of performance is not dictated by the employer. This does not prohibit the reaching of an agreement as to completion schedule, range of work house and maximum number of hours to be provided by the person;
  4. the person holds himself or herself out to be in business for himself or herself;
  5. the person is not required to work exclusively for the employer.

The Internal Revenue Service's general rule for determining who is an independent contractor is that the employer has control over the end result, but the independent contractor has control over how the work will be completed. In all cases, the IRS has the final say on whether a worker is an independent contractor.