The Study of Projected Growth Industries for the 21st Century
Presented to the Faculty of the Graduate School
Rochville University
in Partial Fulfillment of the Requirements for the Degree of
Doctor of Business Administration
in Public Administration
by
WASANA KHONGSAKUNSAP
December 2011
The dissertation committee of Rochville University has approved the subject : The Study of Projected Growth Industries for the 21st Century for the degree of
Doctor of Business Administration
Projected Growth Industries for the 21st Century
As investors, business owners or entrepreneurs, it’s important to understand the shifting sands of the top industries for growth in today’s economy. Some discrepancies are obvious. For example, print media would be classified as a dying industry, while smartphones and tablets are regarded as a surging one. Others are less apparent but far more important – such as the decline of solar stocks and the rise of farm related commodities. What are the four top industries for long-term growth in the second decade of the 21st century?
Farming
The math is simple. Arable land in the world is decreasing and global demand, fueled by emerging and developed economies, is skyrocketing. The increasing demand for corn-based ethanol as a fuel will also exacerbate this problem. Farmers need to maximize the potential of their farmland to cash in on rapidly rising crop prices. Global warming is causing unpredictable adverse weather conditions which only worsen the situation. The businesses which will profit handsomely are fertilizer companies producing the three main components of fertilization – nitrogen, phosphorus and potassium. Nitrogen is essential for leaf growth and greener leaves, phosphorus is necessary for strong roots and fruit development and potassium (potash) is necessary to increase the strength, size and color of the plant. Genetically modified seeds, which increase the yield and pesticide resistance of crops, will also increase substantially in demand. Chemical manufacturers specializing in both will benefit the most from this long-term shift in supply and demand. Note that this does not include livestock producers – these should be avoided at all costs due to the increasing cost of grain-based feed.
Oil
The global battle for oil has raged for half a century now, with the amount of available oil fields decreasing every year. Smaller companies have even resorted to new technologies to siphon out the last remaining drops of oil from abandoned fields in order to make a profit. Despite the dip in prices due to the perceived slowdown of developed nations, the uptrend is intact. Emerging markets relying on dirtier, cheaper sources of energy will drive the demand for fossil fuels, while neglecting the more expensive, less powerful green choices of wind and solar power. Multinational oil companies such as ExxonMobil and Chevron will gradually climb as global demand outpaces supply, and supply and refinery producers such as Halliburton will also continue to profit. An increasing amount of cars manufactured in China and India will also drive the global demand for black gold.
Mining
As economic growth resumes, so will the demand for industrial and precious metals, for two very different reasons. Industrial metals – such as iron, aluminum and molybdenum, will be in high demand as construction projects shift into high gear in emerging economies. Precious metals – such as gold and silver – will be in high demand as a hedge against inflating currencies. Of these, silver is straddled across both – due to its uses in the tech industry as well as a hedge. The mining industry will benefit from heightened demand from India, China and Latin America, which will raise prices across the world. Cars, aircraft, trains and buildings all require massive amounts of industrial metal. In addition, the weakened U.S. dollar – in which metals are priced – will also drive up prices. However, both oil and metals are highly cyclical in the short term despite rising in the long term, so it takes a steady hand and an iron stomach to invest in these industries.
Chinese Internet Companies
This is definitely the riskiest of the four industries mentioned, but it can also be the most rewarding. China currently has three times the population of the United States and only a small percentage of its citizens are currently online. Combine that with a rapidly rising, highly wired middle class and you have fertile ground for all sorts of exciting, highly profitable business opportunities. The growth of Baidu, “The Google of China”, is one of the strongest cases for this industry. However, for every Baidu there are thousands of dead-on-arrival flops with poor balance sheets and shady accounting practices. Although this has led many American analysts to believe that China is headed towards its own dot-com bust, the strongest names in the key sectors of Internet search, advertising and e-commerce will survive and outpace their Western counterparts.
Other Opportunities
These are some of the most highly favored industries in today’s market climate. The only way to stay on top of these rapidly shifting trends is to keep reading and to stay updated regarding the latest market movements. Purchasing individual stocks, instead of mutual funds, will also force you to stay abreast of changing trends and macroeconomic currents in the international market. Trends can seemingly change overnight, so monitoring current signals is vital.
What is a C Corporation?
A business can be set up in a variety of ways, ranging from a sole-proprietorship to a general partnership, an LLC to a corporation. Corporations are remarkably different from other forms of businesses in the sense that it is an independent legal entity that is separate from the people who own, control and manage it. Due to this recognition as an individual entity, it is viewed as a legal “person” in the view of tax laws, and can thus be engaged in business and contracts, can initiate lawsuits and itself be sued. It also must pay taxes.
A C corporation is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code. In an S corporation, the profits are passed on to the shareholders, and are taxed based on personal returns. This is done under subchapter S of the Internal Revenue Code.
A C corporation is owned by shareholders, who must elect a board of directors that make business decisions and oversee policies. In most cases, a C corporation is required to report its financial operations to the state attorney general. Because a corporation is treated as an independent entity, a C corporation does not cease to exist when its owners or shareholders change or die.
Another major advantage of a C corporation is that its owners have limited liability. Thus, they do not stand personally liable for debts incurred by the corporation. They cannot be sued individually for corporate wrongdoings.
Major Benefits of a C Corporation
· As opposed to a sole proprietor or an LLC, corporations are usually at a lower risk of being audited by the government.
· The owners and the shareholders of a C corporation have a limited liability towards business debts.
· A C corporation can deduct the cost of benefit as a business expense. For example, they can write off the entire costs of health plans established for employees as business expenses. These benefits are tax-free even for those receiving them.
· A C corporation can be used to split the corporate profit amongst the owners and the corporation. This can result in overall tax savings. The tax rate for a corporation is usually less than that for an individual, especially for the first $50,000 of taxable income.
· In a C corporation, there can be an unlimited number of stockholders. This allows the corporation to sell shares to a large amount of investors, which allows for more funds to be raised for projects.
· Additional funds can be raised by a C corporation by the way of sale of stocks if the company stands in need of finances for expansion
· Foreign nationals have a right to own or invest in a C corporation. There is no binding on the type of investors as in the case of an S corporation. This lets a greater number of diverse investors participate in the business and also allows foreign money to flow in for investment.
· The owner (majority shareholder) of a C corporation has the option of issuing different “classes” of stocks to different shareholders. This helps attract different groups of investors as common stocks and preferred stocks both have their own distinct advantages that may appeal to one but not to another.
C Corporation Requirements
There are various routine formalities that a C corporation needs to follow. These routines are an integral part of the working of a C corporation, and failure to follow these formalities can lead to serious consequences, including denial to recognize the company as a corporation. The formalities that need to be followed in a C corporation are:
· Adequate investment of money (capitalization) in the corporation.
· Formal issue of stocks to the initial shareholders.
· Regular meetings of directors, and the shareholders.
· Upkeep and update of business records and transactions of a corporation separate from those of its owners.
While a C corporation is an attractive way of forming a business due to its provision of limited liability to its owners, there are certain circumstances wherein the limited liability will not be able to protect the owner’s personal assets. An owner will be held personally liable if:
· He or she directly injures someone personally.
· He or she has personally guaranteed a loan or a business debt for the corporation, which the corporation fails to repay.
· The person fails to deposit taxes that have been deducted from the employee wages by the corporation.
· Such a person is part of intentional fraud or other illegal action that results in loss to the corporation, or someone else.
· Such a person treats the corporation as an extension of his/her personal property, rather than a separate entity.
· The courts rule that a corporation ceases to exist, as the corporate formalities have not been adhered to.
What is a Limited Liability Company (LLC)?
A Limited Liability Company, also known as an LLC, is a type of business structure that combines traits of both a sole-proprietorship and a corporation. An LLC is eligible for the pass-through taxation feature of a partnership or sole proprietorship, while at the same time limiting the liability of the owners, similar to a corporation.
As the LLC is not considered a separate entity, the company does not pay taxes or take on losses. Instead, this is done by the owners as they have to report the business profits, or losses, on their personal income tax returns. However, just like corporations, members of an LLC are protected from personal liabilities, thus the name Limited Liability.
Limited Liability Companies are recognized in all 50 states and the District of Columbia. In most states any type of business can form an LLC, though some state laws may require at least two members in order to form one.
Advantages of an LLC
· The members of an LLC have protection against liability. They cannot be held liable for company losses, or debts and business credit, and their personal assets (such as a house or car) cannot be recovered by the debtors.
· LLCs have the freedom of selecting any form of profit distribution, which does not have to be in the ratio of the ownership between different members.
· LLCs do not have a legal requirement to conduct formal meetings, maintain minutes of the meeting, or record resolutions.
· Benefits similar to a corporation are available without going through any incorporation formalities.
· Pass-through taxation principles apply and the company itself is not taxed unless it opts for being treated as a regular corporation. All business profits, losses, and expenses are accounted for by its individual members. Members have to show the earnings in their individual tax returns and accordingly pay taxes. This allows the avoidance of double taxation by way of corporate tax payment along with the individual income tax.
Disadvantages of an LLC
While the advantages largely benefit most small businesses, certain aspects of an LLC can prove to be disadvantageous. This is especially true for larger organizations. Some of the disadvantages of an LLC are:
· LLCs have a limited life and are usually dissolved when a member dies, or if the company faces bankruptcy.
· LLCs cannot go public, as there are no shares or shareholdings. For the same reason, issuing shares to employees through stock options is not possible.
· Even though the paperwork and the complexities associated with LLCs are significantly less than those required for forming a corporation, its formation is still substantially more complex than a partnership or sole-proprietorship.
In most states, an LLC can be created simply by filing the “articles of organization” and paying the required filing fee. This document is also known as a “certificate of organization” or a “certificate of formation”. Some states have an additional requirement of publishing an intention to create an LLC in a local newspaper. Another part of forming an LLC is the operating agreement, which is not compulsory in most states, but is highly recommended. This document explicitly states the rights and responsibilities of the LLC owners.
What is an S Corporation?
Deciding which type of corporation is the best for your business can be a confusing and tedious task. Two types of corporations are recognized by the Internal Revenue Service for the purpose of federal income tax imposition: C corporations and S corporations. An S corporation is a special structure of business ownership by which the business is able to avoid double taxation because it is not required to pay corporate income tax on the profits of the company. All profits/losses are passed on directly to the shareholders of the company. The shareholders file individual tax returns and pay income tax on whatever share of profits they receive from the business. If the business has more than one shareholder the business must file an informational tax return to provide details of the corporate income of each shareholder. This article will talk in detail about the positives and negatives of incorporating a company as an S corporation.
A business electing to incorporate with S corporation status has its business income taxed only once, similar to how sole proprietorships and partnerships are taxed. By electing to become an S corporation, a small business can avail the legal advantages available to businesses with a corporate structure as well as the tax advantages available to partnership firms. Such provisions have been made primarily in order to promote small businesses and relieve them from the financial burden of double taxation. A business wanting to take advantage of the tax benefits available to S corporations has to make an election for being treated like one. This election is made by filling out Form 2553 and submitting it to the Internal Revenue Service. The form requesting this election, duly signed by all shareholders, should be submitted on or before the 15th of March of the tax year from which a corporation elects to be treated as an S corporation. The business however must conform to certain set criteria before it can be accorded an S corporation status.
The relevant provisions containing details that also specify the criteria for S corporation eligibility can be found in Chapter 1, Subchapter S of the Internal Revenue Code. They state that in order to be eligible for becoming an S corporation a small business needs to have fewer than 100 shareholders. Every shareholder must be a US citizen or US resident. It is also required that all shareholders support an S corporation business structure. A business that elects to be treated as an S corporation is required be a domestic company located within any state in the US. Individuals, estates and selected types of trusts qualify for becoming shareholders of an S corporation. The S corporation can have only one class of stock. This can broadly be understood as all shares of the corporation conferring equal and identical rights on shareholders in terms of profit distributions and liquidation proceeds.
All criteria must be met right from the time of submitting form 2553 and should continue as such till the time the S corporation status is no longer desired. Any violation of any of the mandatory provisions results in an automatic and immediate termination of the S corporation election. Once this happens, the corporation acquires the status of a taxable entity. As mentioned earlier, S corporation election relates only to federal income tax. For the purpose of state income tax, it is essential to check with the taxation department of the concerned State to ascertain as to how that State treats the federal S corporation status for determining the State corporate income tax, as many States do not recognize it for the purpose of tax exemption.
Advantages of an S Corporation:
· No Corporate Tax
· Reduce Taxable Gains
· Write off Start-up Losses
· Liability Protection
Disadvantages of an S Corporation:
· Limited to 35 shareholders
· Can only use domestic capitalization
· Shareholders pay taxes on all profits in the year earned, whether or not they are distributed.
· Generally must operate on a calendar year
Choosing a business structure for your small business is never easy. It is advisable to acquaint oneself with the business of company formation and then make an informed decision in consultation with legal counsel that specializes in corporate law.
What is a limited partnership (LP)?
Business partnerships can be either general or limited, and as far as tax codes are concerned, exist as long as profits, losses and costs of a business are shared. While general partnerships are more common, limited partnerships are a popular method of raising capital from passive investors who prefer to not be involved in day-to-day business operations. Limited partnerships (LPs) have two sets of partners, namely one or more general partners who have personal liability and one or more limited partners who are not liable for debts. Business owners who do not want the liability for the debts incurred by the corporation prefer this option. Limited partners usually do not play any role in the day-to-day management of the company.
Pros of Limited Partnerships:
· Generally, pass-through taxation is applicable to limited partnerships, meaning that the tax burden is passed on to the partners instead of the partnership itself. Thus, profit earnings are passed on to the partners in the form of wages, income, and profit payments and each partner pays tax that is proportionate to his individual share of profits.
· A business can obtain much-needed investment capital by giving more passive investors the option of reducing their risks by becoming limited partners
· Since there is no direct involvement of limited partners in the management of the business, general partners enjoy full autonomy and have the right to make important business decisions.
· In the case of a general partnership, all partners are responsible for the debts and other liabilities. The liability of a limited partner does not exceed his capital investment in the company.
In the event of a lawsuit the names of the limited partners cannot be included in the list of defendants. Limited partnerships are quite common in businesses such as restaurants and other business ventures where there is high financial risk. The limited partners will only provide the necessary funds, and stay aloof from the business operations and management. Due to this lack of involvement in management of business, LPs are also called “passive investors”. In order to enter limited partnership, partners need to file the necessary formation documents with the concerned state agency along with the state filing fees applicable.
Cons of Limited Partnerships: Limited partnerships do have downsides:
· Certain tax rules restrict LPs from claiming partnership losses beyond $25,000 per year. If losses exceed this amount the partners can carry forward the amount of passive investment losses to be claimed in the tax returns for the following year. This limit is exercised each tax year and is applicable to all those who are only concerned with the capital aspect of business ventures and in no way interfere in the business affairs.
· It is fairly easy to compute tax if partners have invested only cash. However, if non-cash financing options, such as vehicles or real estate, are involved more complicated tax rules are applicable.
· Sometimes limited partners may be tempted to participate in the management of the business and may therefore want to step out of the passive investor role. This kind of involvement may make them general partners and forbid them from exercising their limited liability privilege.
What is a Limited Liability Company (LLC)?
A Limited Liability Company, also known as an LLC, is a type of business structure that combines traits of both a sole-proprietorship and a corporation. An LLC is eligible for the pass-through taxation feature of a partnership or sole proprietorship, while at the same time limiting the liability of the owners, similar to a corporation.
As the LLC is not considered a separate entity, the company does not pay taxes or take on losses. Instead, this is done by the owners as they have to report the business profits, or losses, on their personal income tax returns. However, just like corporations, members of an LLC are protected from personal liabilities, thus the name Limited Liability.
Limited Liability Companies are recognized in all 50 states and the District of Columbia. In most states any type of business can form an LLC, though some state laws may require at least two members in order to form one.
Advantages of an LLC
· The members of an LLC have protection against liability. They cannot be held liable for company losses, or debts and business credit, and their personal assets (such as a house or car) cannot be recovered by the debtors.
· LLCs have the freedom of selecting any form of profit distribution, which does not have to be in the ratio of the ownership between different members.
· LLCs do not have a legal requirement to conduct formal meetings, maintain minutes of the meeting, or record resolutions.
· Benefits similar to a corporation are available without going through any incorporation formalities.
· Pass-through taxation principles apply and the company itself is not taxed unless it opts for being treated as a regular corporation. All business profits, losses, and expenses are accounted for by its individual members. Members have to show the earnings in their individual tax returns and accordingly pay taxes. This allows the avoidance of double taxation by way of corporate tax payment along with the individual income tax.
Disadvantages of an LLC
While the advantages largely benefit most small businesses, certain aspects of an LLC can prove to be disadvantageous. This is especially true for larger organizations. Some of the disadvantages of an LLC are:
· LLCs have a limited life and are usually dissolved when a member dies, or if the company faces bankruptcy.
· LLCs cannot go public, as there are no shares or shareholdings. For the same reason, issuing shares to employees through stock options is not possible.
· Even though the paperwork and the complexities associated with LLCs are significantly less than those required for forming a corporation, its formation is still substantially more complex than a partnership or sole-proprietorship.
In most states, an LLC can be created simply by filing the “articles of organization” and paying the required filing fee. This document is also known as a “certificate of organization” or a “certificate of formation”. Some states have an additional requirement of publishing an intention to create an LLC in a local newspaper. Another part of forming an LLC is the operating agreement, which is not compulsory in most states, but is highly recommended. This document explicitly states the rights and responsibilities of the LLC owners.
What is a non-profit corporation?
Every individual who operates a business has the ability to incorporate his or her business in a fashion that permits the best tax benefits. Each type of corporation has a different set of benefits and legal implications, so it is important for an individual to choose a structure that best fits their business requirements. Business owners need to consider factors such as the number of people involved, the tax situation of their business, and what’s at stake if the business incurs heavy losses. An individual or a group that operates a non-profit or charitable organization working for a religious, educational, civil or any other cause that is in public interest may also choose to incorporate. Many prefer to form a non-profit corporation that is usually managed by volunteers or paid positions and operates for non-commercial purposes. From musicians and artists to individuals or groups who are engaged in health, education, and community services, everyone can benefit from a non-profit corporation. The non-profit status of a business is a basic requirement to qualify for funds from government agencies and private foundations. Apart from getting grants, there are other benefits of non-profit corporations.
One of the often-quoted advantages of non-profit corporations involves their tax status. A non-profit corporation can seek exemption from various federal and state income taxes under Section 501(c) of the Internal Revenue Code. This is one reason why non-profit corporations are also referred to as 501(c) corporations. This kind of tax rebate not only covers the income generated by the corporation, but also applies to all the donations it receives. It is therefore a beneficial situation for both the corporation and its donors who get tax exemption for their contributions.
The term “non-profit” does not imply that a corporation with this status cannot make money. There are, however, a number of restrictions on how such a corporation can use earnings. Congress and the Internal Revenue Service have laid down certain parameters that an organization must follow in order to qualify as a nonprofit corporation. One major parameter states that profits cannot be distributed among its directors, officers, or members that are responsible for managing the affairs of the organization. While shareholders of for-profit corporations are entitled to get stock in exchange for their capital investments, and thus receive a return on their investment by way of dividends. The organization can use its tax free profits to cover operating expenses, such paying salaries. Due to its exempt status, filing of regular tax returns may not be required if the corporation’s gross annual income remains below $25,000. Receiving donated goods worth over $5000 and disposal of donated goods worth over $2500 would require filing special purpose tax returns.
All assets of a non-profit corporation are required to be dedicated to the tax exempted purpose for which it is formed. This implies that in case of its dissolution the assets need to be distributed to some other tax-exempt 501(c) organization. Failure to comply by these requirements could result in the organization losing its tax-exempt status. All activities of the corporation must be strictly related to nonprofit purposes. Organizations that come under the tax-exempt category include labor organizations, business leagues, real-estate.
What Business Structure Should You Choose?
As you plan starting up your own business, one of the first decisions you need to make is the formal business structure you will assume. Which structure you choose depends on your industry, growth goals, and how many people you plan to involve in your company. It is important to have a full understanding of the business structure you take – but at the same time, I caution you to avoid paralysis through analysis. Make an informed decision and get back to focusing on starting and nurturing the growth of your business.
The following are six types of business structures you could choose from.
Sole Proprietorship
This is the easiest type of business to start. There are no incorporation forms to file or fees to pay with the government. You pick your business name, and get to work. With a sole proprietorship, you avoid double taxation that occurs in corporations as every dollar you earn hits your personal income tax. You pay no corporate income tax.
Because of the ease of starting this type of business, there is a larger amount of risk involved due to the lack of incorporation. How much risk? You are personally liable for everything done in the business’ name. You can hire employees as you would with any other business, but if they damage someone else’s property you can be personally sued for the damages. This puts everything you own at risk.
Partnership
A partnership is where two or more individuals formally agree to do business together. Partnerships are very easy to form, and the income earned from the business is filed on the individual partners’ tax returns. As with a sole proprietorship, you pay no corporate income tax and avoid double taxation.
However, as with a sole proprietorship, there are risks involved. Partners are personally legally liable for not only their actions, but the actions of all general partners. For example, if your partner takes on a business loan, you are also responsible in seeing that it is paid back.
Corporations and Limited Liability Businesses
There are several types of corporations and limited liability business structures that can be used to avoid some or all of the business’ liability undertaken with a sole proprietorship or partnership.
C Corporation
In this business structure, you pool your money together with other shareholders and are given stock in the newly formed business. A C Corporation is viewed as a completely separate tax entity in the Internal Revenue Service’s eyes, so your business can take tax deductions just as an individual would. This also means your profits will be taxed twice: once at the corporate income tax level, and then again when the corporation pays you via salary, bonuses, or dividends. Since the C Corporation is a separate entity, your personal liability is limited.
S Corporation
An S Corporation is a legal entity formed just like a C Corporation with the added bonus that income flows directly to your personal income taxes through what is called “pass through” taxation. There is no double taxation. This structure is especially nice because your liability is limited to that of a regular shareholder, but you only pay tax once.
Limited Liability Corporation
An LLC is a state allowed business structure that mixes the benefits of sole proprietorships and corporations while removing some of the disadvantages. Owners of LLCs are referred to as members. There can be any number of members, but there is always a a managing member who is in charge of daily operations for the business. All members are not personally responsible for judgments made against the company, and taxes pass through to their personal income taxes. There is also a lot less paperwork for an LLC compared to a C corporation or S Corporation. You are also not required to have a shareholders meeting every year, nor a board of directors.
Limited Partnership
A limited partnership is an interesting twist on the partnership model. If you try to form a business as a partnership you will find it hard to raise capital due to the risks involved, with all partners being liable for one partner’s actions. A limited partnership aims to avoid this scenario by having two types of partners: general and limited. General partners are the ones involved in the day to day operations of the company, and still share all of the liability of all general partner’s actions. Limited partners are essentially passive investors, be it angel investors, venture capitalists, or friends and family, who contribute funds and are paid profits, but cannot participate in the management of the business.
Final Thoughts
When selecting a business structure, limiting your liability should be one of your first priorities. Choosing more liability for ease of set up can be dangerous. Even if you play things very safe and are confident in your future performance, there is still a chance you make a mistake along the way that could cost you your home. But time and effort involved in setting up a business structure with less liability can be costly, as well. Get specific advice from your lawyer, CPA, and the Small Business Administration before moving forward. Make the right decision the first time so you can concentrate on growing your business in the long term.
Tax Issues Related to Your Business
Small Business
Small businesses must withhold federal income taxes from their employee’s wages and pay them directly to the IRS. The amount depends on the size of the payments, the number of exemptions claimed by each employee, their marital status, and the frequency of the payments. Each employee must complete a W-4 form to determine withholding exemptions.
Employers must also withhold 6.2% of each employee’s income for Social Security and 1.45% of each employee’s income for Medicare, in addition to the matching contribution that the employer makes.
Most employers are also required to pay federal and state unemployment taxes under the Federal Unemployment Tax Act.
An excise tax is a tax paid for the sale or manufacture of certain commodities. For example, environmental taxes, communications taxes, or fuel taxes could be excise taxes levied on a particular business. Depending on what the business manufactures or sells, some businesses might not be required to pay these at all.
· Sole proprietorship A sole proprietorship is a company with only one owner that is not registered with the state as a limited liability company or corporation. The owner does not pay income tax separately for the company, but he/she reports business income or losses on his/her individual income tax return. The owner is inseparable from the sole proprietorship, so he/she is liable for any business debts.
Self-employed or sole proprietors report their taxes through Form 1040 and Schedule C for net profit and loss from their business. Employers are also required to make quarterly estimated tax payments if they expect their business to earn more than $1,000.
· Partnerships A partnership is a business, which has one or more owners and that is not a limited liability company or corporation. Partners share equal responsibility for the company’s profits and losses, and its debts and liabilities. The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax return. Estimated tax payments are also necessary for each of the partners for the year in progress.
Partnerships must file a return on Form 1065 showing income and deductions. Estimated tax payments are also required if they expect their income to be greater than $1,000.
· Limited Liability partnerships A limited liability partnership is a business organization that has one or more general partners who manage the business and assume legal debts and obligations, and one or more limited partners who do not participate in the day-to-day operations and are liable only to the extent of their investments. As a limited partner, you share in the profits and losses, and these are taxable events to you. This means that if the partnership makes money at a point in the year and the general partners reinvest those profits instead of paying them to you, you may have to pay taxes even if you do not receive cash in return. Be sure to consult with a tax professional if you participate in a limited partnership.
· Corporations A corporation is an independent legal entity, structured and regulated by state law. This implies that the owners of the corporation are not directly liable for business losses or debts. There are “C” corporations, which we will discuss below, and “S” Corporations, which are those who elect partnership-style taxation, as discussed in the Partnerships section above. Owners pay taxes on profits paid to them through salary, bonuses or dividends. The corporation itself pays taxes on annual profits, called net income. There are special tax rates that apply to this type of business. If a corporation were to pay out its yearly after-tax net income to its owners in the form of dividends, the owners would be taxed on the dividends. This is called double taxation because the corporation’s gross income is taxed and the dividends paid out to owners are taxed again. The double taxation only applies to dividends since salary and bonuses are part of the corporation’s expenses and are tax deductible.
Corporations must file an income tax return, regardless of whether or not they received income, by filing Form 1120. “S” Corporations use Form 1120S and are also required to make estimated tax payments.
· Non-profit corporations Non-profit corporations are those which are charitable, educational, scientific, literary or religious. These corporations do not pay federal or state income taxes on profits. Non-profit organizations also have the ability to raise public or private funds and receive donations from companies or individuals.
Self-employed
You can deduct up to 60% of your health insurance for yourself, your spouse and your dependents if you are self-employed or are an “S” corporation shareholder, or if you are not eligible to participate in an employer-subsidized health plan.
Home Office
You can decide to make your home your primary place for business and be eligible for a home office deduction. In order to make this claim, you need to identify the percentage of your home that is used for business purposes. To calculate this, divide the cube-footage of your home used for business purposes by the total cube-footage of your home. This percentage is applied to indirectly related expenses like utility bills, mortgage interest or rent, real estate taxes, repairs, trash removal, and maintenance. Expenses directly related to your business such as computers and printers are 100% deductible. Your primary phone line is not deductible, but a secondary line and long-distance business calls are deductible.
Before taking advantage of these deductions, be aware of the consequences of selling your house. You might have to pay taxes on past depreciation claims and gains relative to the business portion of your home. Also, since your home office is no longer treated as part of your entire home, that part will not be subject to gain exclusion provisions for sale of a personal residence (up to $500,000 for married couples).
Also, be aware that since some taxpayers have abused home office deductions, the IRS is tightening the rules on home office deductions, so be sure to read the latest IRS information to confirm that you’re following the rules.
Finding the Right Co-Founder
If you’re considering finding a co-founder to help you start your business, you already know that you’re not making an easy decision. People have, after all, compared business partnerships to marriage, and everybody knows marriages take work. Still, there’s no denying that co-founders and partners can be a vital part of a healthy business strategy. Here are a few tips to help you choose the right co-founder.
Don’t partner up with someone who is just like you
Ideally, each partner brings something different to the table. One partner might have 15 years in the industry while the other partner might have a great deal of marketing talent. Overlapping strengths can become a point of contention between co-founders. They can also rob your business of the vital expertise that it needs to survive. Find someone who knows things you don’t know and figure out how to partner with that person. Find someone who compliments your strengths.
Find someone who shares your vision
You believe in buying fair trade, your partner believes in buying cheap. You believe in serving only fresh, local food, your partner believes that it’s better to import food. Your partner wants the latest and greatest technology; you’re content to use 5 year old PCs. These sorts of conflicts aren’t just about how things are done. These are conflicts that touch on the very heart of the brand and identity of the businesses they describe.
Craft a vision statement for your business, and make it meaningful in concrete terms. Find a partner who shares that vision. Then, whenever conflicts come up you can go back to the central question: “Does this course of action fit with our vision, or not?” Ideally, both of you should be excited about the direction your company is headed in.
Find someone you can communicate with
You need to find a co-founder who you can talk to—even when you don’t agree. You can’t afford to let conflicts and resentments fester. You also can’t afford a scenario where both partners aren’t aware of what’s going on in the business. You both should feel comfortable expressing your opinions. You both need to feel like you’re in an open, respectful relationship. Only then will your partnership—and the business you are building—flourish.
Find someone with a thick skin
A big part of going into business with a co-founder is developing an exit strategy. You don’t want a partner who is going to be offended by the thought that you don’t want to stay with him forever and ever. This is especially true if you are using the partnership as a springboard into 100% ownership of your own business or location, or if you’ve got visions of selling your share of the business in the future in order to turn a profit.
Find someone with integrity
Watch how your potential co-founder treats other people. If your potential partner is willing to cheat other people, lie to them, or treat them disrespectfully then he’s willing to do the same to you. Furthermore, misbehavior on your partner’s part may tarnish your own business reputation. In the business world, your reputation and your integrity are worth far more than the checks you’re capable of writing. If you and your co-founder are going to build a successful business you want someone who shares your values.
Top 4 Traits of Successful Entrepreneurs
Do you think you have what it takes to be an entrepreneur? Becoming an entrepreneur takes a specific type of personality. Fortunately, it’s the type of personality you can develop by working on yourself, growing, and learning how to express these traits. Focus on the four top traits below and you’ll find yourself ahead of the pack.
An entrepreneur is a problem solver
An entrepreneur looks at a problem and knows it’s an opportunity. That’s not a cliché talking. A problem is literally an opportunity to get paid if you can be the one to solve it. Successful entrepreneurs make their name identifying problems without solutions, and providing those solutions. Every good product solves some sort of problem. Even video games solve a problem—they provide a way for people to unwind after a stressful day and fulfill a fantasy.
If you want to be a successful entrepreneur, your natural response to any given problem should always be to ask yourself how you can solve that problem. Not who is to blame, not how that problem came to be—just how the problem can be solved. Problem-solving becomes a habit. As you become alert to problems with no solutions, you become alert to new ways to create, grow, develop, and innovate new products. If you can marry this alertness to calculated action you will develop the instincts that you need to be an outstanding entrepreneur.
An entrepreneur takes calculated risks
Risk-adverse people don’t make very good entrepreneurs—but neither do extremely reckless people who leap first and look later. Real entrepreneurs evaluate their potential risks. They also know how to minimize the risks they need to take through hard work, dedication, and strategic planning.
When a risk goes bad an entrepreneur doesn’t waste a lot of time looking for someone to blame. Instead a true entrepreneur analyzes what went wrong, learns from it, and moves on.
An entrepreneur is self-motivated
This is about more than simply being your own boss. This is about more than simply being able to get up in the morning and get to work. An entrepreneur is always capable of seeing a tomorrow that’s just a little bit better than today. He’s not satisfied to just sit on his laurels and enjoy the fruits of his success. He’s constantly looking forward—creating plausible plans to create more opportunities and find his next point of success. An entrepreneur is also willing to push himself. Last year’s success was fine, but this year’s success should reflect his growth. He’s always coming up with some new project and looking for ways to make that project succeed.
An entrepreneur is confident
There’s not much room in the business world for self-doubt. Fear can make you back away from projects that could be the key to your ultimate success. Furthermore, the entrepreneur has to be in the business of convincing other people that his ideas are good. Partners, investors, financing, creative structuring—it all depends on the entrepreneur’s ability to convince other people that they’re making a good bet when they team up with him. If the entrepreneur isn’t sure about himself, how can anyone else be sure of him?
Developing Organizational Systems for Better Efficiency
Have you ever felt like your business will stop the day you don’t show up? This happens to almost all entrepreneurs at first. Sometimes it’s because entrepreneurs begin by filling every function their business has to offer, from answering the phones to actually making the product. The business actually winds up getting limited by the number of hours the entrepreneur is capable of putting in. Unless something changes, the business stops growing. It also begins to resemble a job—something the entrepreneur absolutely cannot escape from.
This is usually the point where the entrepreneur hires his or her first employee—but often, this doesn’t solve the problem. The entrepreneur gets caught up in trying to make sure the employee does things “right.”
Systems Are the Answer
A system is a specified way of doing things, and it can apply to every single part of your business. You can develop the “best way” to answer the phones, and then you can write that way down in the form of a script. From then on out, anyone who answers the phone need only observe the script to answer the phones just like you would. If the employee leaves the company, the next employee just needs to stick to the script. There can be scripts for sales presentations. There can be specific instructions for marketing. These instructions can be as simple as noting that blog posts are written every Monday, direct mailers go out once a month, and follow-up calls happen every Thursday.
As you develop more and more systems you free yourself more and more. You can turn your attention away from performing each function of your business. Instead, you can work on finding other people to perform those functions. You can verify they are following your systems, and then you can work on more systems. This is what working “on” your business, instead of “in” your business, is all about.
Systems Give Your Business More Value
When someone buys a franchise they aren’t just buying a brand name—they are buying the specific systems that led to the franchise’s success. Systems are the exact reason why McDonalds is such as success—most McDonald’s franchises runs exactly the way every other McDonalds does, regardless of who owns or manages any individual branch. If you develop systems for your company you are opening up the possibility of turning your company into a franchise, creating a lucrative opportunity for your future.
If you’re not interested in franchising, you should know that you may be interested in selling your business one day. Having systems in place, all carefully recorded in an operations manual, will make your business far more valuable. A lack of systems means you’re really just selling “FFE”—furniture, fixtures, and equipment—as well as, perhaps, a location. Offering systems means you’re selling a turn-key business that has been a proven success. The latter is worth a lot more money, meaning you’ll enjoy a much higher return on your hard work and creativity than you might otherwise have.
APPENDFIX:Managing Small Business Growth
Small business owners generally love the word “growth” since when used in relation to a business, it usually means success. A growing business is a thriving business, or so most people believe. Unfortunately, many small business owners discover the hard way that business growth may result in problems if your business isn’t equipped to handle that growth – and can even kill your business all together!
All growing businesses eventually reach their limit. You might run out of employees to handle the new volume of orders or customers. You might not have enough product to meet demand. Most small businesses struggle to manage operational issues during a growth phase, and it can be hard to decide whether it’s time to hire additional employees or if this is just a short-term spike in sales or customer volume. The following are tips for managing growth in a small business.
Maintain Owner/Management Role
If you find yourself performing the tasks of your employees – creating the products or fulfilling the services your company offers, it’s time to take a step back. As the business owner, you should maintain a management role in the organization. If you don’t have enough manpower without you on the front lines, it’s time to either replace existing employees who are not generating the necessary return on investment (what you pay them), or hire additional employees so that you may focus on the administration, management, and strategy.
Add Organizational Systems and Procedures
When a business is started, many small business owners check over the details of their employee’s work, correct any mistakes or problems before they reach the customer, and generally just keep a close eye on how everything is running. If you are growing rapidly, you won’t have the time to continue this with as much detail. A business needs systems and procedures for managing staff and providing the products or services of the company. There should be product or service quality control standards to ensure the business turns out the same level quality whether you are in a slow period or a growth period. Look at your daily business operations and determine what tasks can follow specific systems and procedures, and then get everyone on board. When your business relies on systems and procedures, it will manage growth much better than one that simple scrambles to keep up as business expands.
Keeping Growth in Check
For most business owners, growth is welcomed but it’s important to keep your growth in check. When you start generating more sales than you had previously, it can be tempting to spend more money than you’re able to – perhaps you decide to upgrade computer or technology, or hire more staff to handle the new business growth. Both are excellent uses of business income, but if you’re not careful you may spend more than you can afford and then your financial stability could be damaged. The growth phase that should have resulted in higher profits could easily turn around and cause a cash flow problem if you aren’t careful to keep the growth of the business in check.
