It might be tempting to seal a deal with a handshake. After all, formalities just slow things down and, as a small business owner, you’ve got countless other things to do with your time. However, when you make a contract, proper documentation will give you and your business solid legal protection should the need arise.

While specific business needs vary, below are three common legal contracts you should draw up for your business.

Make a Contract: 3 Contract Agreements You Should Have

1. Partnership Agreement

If you’re starting or running a business with someone else, you need some kind of agreement in writing. Even if your business partner is your spouse, best friend or sibling, having some kind of partnership agreement in place from the start can be a helpful to figure out the inevitable issues that come up during the course of running a business.

The partnership agreement should contain the following:

• Define who contributes what: Discuss what you and your partner will be bringing to the table in terms of labor, time, cash, property, customers, etc. Who plans on working on the business full-time, part-time or just acting as a silent partner?
• Define who gets paid what: Outline how profits will be distributed. Will each partner be paid a salary for his or her role in the business? How much? What about any extra profits for the year?
• Define how decisions get made: What type of decisions require unanimous votes, and what type of daily decisions can be made by a single partner? Discuss these matters upfront and decide what decision-making structure will let your business run the most effectively while making sure that no one feels left behind.
• Define what happens to ownership interests: Decide what happens if/when someone dies, retires, goes bankrupt or just wants out. Maybe add in a non-compete clause to protect against a partner leaving, taking your customers and setting up a competing business.

An Internet search for “partner agreement template” will turn up numerous partnership contracts you can use.

Remember that while you may think you’re on the exact same page as your partner(s) today, situations can easily change over the course of a few years. A few conversations and a little administrative work to make a contract at the start can save you major headaches and potential legal battles down the road.

2. Non-Disclosure Agreement (NDA)/Confidentiality Agreement

Whenever you’ll be sharing your company’s proprietary information with somebody, you should ask them to sign a non-disclosure agreement (NDA). Your company’s proprietary info can be anything from the code written for a mobile app product, your business plan, marketing plan, forecasts or financial numbers, as well as your client and customer list.

For example, if you partner with a vendor or freelancer for a marketing project, you should draw up an NDA to make sure your customer list is protected.

You can find a sample NDA template from SCORE. As with any template you download from the Internet, you should have it reviewed by your attorney prior to use.

3. Independent Contractor Agreements

For many small businesses, outsourcing to independent contractors is a great way to get some added help, fill a specific need or bring in specific expertise. It’s a flexible arrangement, and you don’t have to pay workers’ compensation, payroll taxes or employee benefits for contractors and freelancers. However, be aware that the IRS is now on the lookout for employers who misclassify their workers as independent contractors to avoid paying payroll taxes, etc.

For this reason, it’s smart to make a contract.  Create an independent contractor agreement that explicitly defines the relationship between you and the worker. Make it clear that you intend the worker to be an independent contractor who is responsible for his or her own taxes. In addition, the agreement should not exert much control over how work will get done. Don’t set specific hours for when they need to work, or where.

While having this agreement isn’t going to protect you 100 percent from an IRS audit or misclassification ruling, it does provide evidence that you intended to hire an independent contractor.

For these three contracts, as with any legal formality, it’s always best to invest a little time. Make a contract and get it squared away upfront, rather than waiting until you actually need the contract. By then, it’s typically too late. Talk to an attorney if you have any questions at all or just want a professional set of eyes to review a contract. Your business is worth it.

Contract Photo via Shutterstock

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The end of tax time typically brings renewed interest in business structures. Fresh from filling out their tax forms, sole proprietors and partners in a general partnership are often concerned about self employment taxes and wonder if there’s a way to legally keep more of their hard earned money.

If you have a sole proprietorship or general partnership, read on to learn if incorporating or forming an LLC for your business can help you reduce self employment taxes. In addition, if you’re thinking about starting a business this year, you have an opportunity to start off right with a formal business structure.

How You Can Lower Your Self Employment Taxes

An Intro to Self Employment Taxes

The self employment tax is an extra tax that self employed business owners, independent contractors and other independents need to pay. Self employment taxes are how sole proprietors (and partners in a general partnership) pay social security and Medicare payroll taxes.

When you’re an employee at a company, you split these taxes with your employer (typically, each pays 7.65 percent of eligible wages for the tax). But when you’re self employed, you’re essentially both the employer and the employee and thus, you’re responsible for both contributions.

Note that self employment taxes were reduced for 2011 and 2012, but are set to rise to the regular level for tax year 2013. This provides added incentive to take a look at your business structure for the years ahead.

LLC and S Corporation: Can They Lower Self Employment Taxes?

The LLC and S Corporation are popular business structures for small businesses, freelancers and entrepreneurs. Many small businesses begin as a sole proprietorship or general partnership and then ultimately transition to an LLC or S Corporation.

Both entities let you “pass through” your taxes. Meaning, the company itself doesn’t pay taxes, but profits and losses are passed on to your personal tax return. This is an important distinction from the general C Corporation that must file its own taxes (and often results in an increase in taxes for the small business owner).

For the S Corporation and LLC taxed as an S Corporation, you’re able to split your profits into two payment types – salary and S Corp distributions. You pay social security/Medicare tax only on the salary portion. This means that if your business made $80,000 in profits and you pay yourself $40,000 in salary and $40,000 in distributions, you only have to pay social security tax on the $40,000 salary.

Sounds good, right? Why not take it a step farther and pay yourself $1,000 in salary and $79,000 in distributions? That way you can really minimize your self employment (social security/Medicare) taxes. However, that type of compensation is not allowed, as the IRS requires you pay yourself a “fair and reasonable” salary and these distributions are watched very closely. You’ll have to pay yourself fair market rate for whatever services you provide to the company. Yet even so, small business owners can often significantly reduce their self-employment taxes by setting up as a corporation or LLC.

For example, if you’re running a sole proprietorship and you’re bringing in more in profit than a “fair and reasonable” salary, then it probably makes sense to form an S Corporation or LLC that’s taxed as an S Corporation.

Bear in mind that with a formal business structure, you’re generally required to operate your business at a higher administrative level than with the sole proprietorship (where there’s no paperwork at all). If you’re concerned about having too much paperwork and legal formalities, opt for the LLC and then elect to be taxed as an S Corporation. In general, the LLC has fewer legal requirements than corporations (S Corporations and C Corporations).

The Other Upside: Protecting Your Personal Assets

While lowering one’s taxes is often the driving force behind incorporating, LLCs and S Corporations offer another significant benefit for the small business. That is, protecting your personal assets.

With a sole proprietorship or general partnership, your own personal savings, property and other assets are at risk to settle any debts of the business. Yet once your business becomes an LLC or S Corporation, it exists as its own entity. This offers a shield between your personal assets and the business, giving you added peace of mind.

While most small business owners I know have little time to spare, I encourage you to take some time and investigate the various business structures. Speak with a tax advisor to learn more about your own personal situation.

As self employment taxes are set to rise back to the pre-2011 levels, it’s smart to act now to get ready for your 2013 taxes and beyond.

Grasping Money Photo via Shutterstock

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Do you know the difference between an S Corp and a C Corp? Have you ever wondered if you should form an LLC for your business or where you should incorporate? Or maybe you’re not sure if you need to create a non-profit for your activities? These are just a few of the frequently asked questions about incorporation.

Assembled below are all the answers to the most frequently asked questions when it comes to incorporating your business. If you’re a small business owner, read on to learn more about the various business structures and how you should incorporate your business.

Frequently Asked Questions About Incorporation

1. What are the benefits of incorporation?

The main reason to incorporate (or form an LLC) is to minimize your personal liability. Once your business is incorporated (either by forming an LLC or Corporation), it exists as a separate business entity. Essentially, you put a wall separating your personal assets from anything in the business.

Of course, there are other benefits too. Here are the top reasons to incorporate:

1. Minimize your personal liability and protect your personal assets.

2. Get more flexibility when it comes to taxes (talk to your CPA or tax advisor for specific advice on your personal situation).

3. Boost the credibility of your small business.

4. Add a layer of privacy (don’t use your personal name and home address to represent your business).

5. Start building your business credit.

6. Protect your business name and brand at the state level.

2. What are the drawbacks of incorporation?

The only real “drawback” of incorporating is that you’ll need to operate your business at a higher administrative level than you’re used to as a sole proprietorship. In addition, incorporating as a C Corporation can result in higher taxes for some small business scenarios due to double taxation.

With a C Corporation, the business needs to pay taxes on any profits, and then owners are also taxed when any profits are distributed to them. Obviously, if you’re looking to put your small business profits into your own pocket, you may end up paying a lot in taxes. However, as the following question shows, there are ways to avoid double taxation while still getting some of the benefits of incorporation.

3. What’s the difference between a C Corp and an S Corp?

As mentioned above, the C Corporation’s tax structure isn’t optimal for many small businesses, since business owners often are taxed twice on the profits. However, Corporations can elect for “S Corporation” tax treatment. Often called a “pass-through” entity, an S Corporation doesn’t file its own taxes. Rather, profits and losses of the business are passed through and reported on the business owner’s personal tax return.

To qualify for S Corporation tax treatment, you’ll need to fill out Form 2553 with the IRS. You’ll need to do this no more than 75 days from the date of incorporation, or no more than 75 days from the start of the current tax year.

Be aware that not every business can qualify to be an S Corporation. For example, an S Corporation cannot have more than 100 shareholders and shareholders must be U.S. citizens or residents.

4. What’s an LLC?

An LLC (Limited Liability Company) is a hybrid of a sole proprietorship/partnership and corporation. This structure is very popular among small businesses, and for good reason. The LLC limits the personal liability of the owners, but doesn’t require much of the heavy formality and paperwork of the corporation. This makes it a great choice for business owners that want liability protection but don’t want to deal with exhaustive meeting minutes, addendum filings or other paperwork you’d need to file as a corporation.

You can structure your LLC to be taxed as an S Corporation (as described above) where company profits flow through to the owners and are taxed at the personal income rate.

5. What’s a non-profit corporation?

A nonprofit is created for charitable, educational or other purposes (actually there are five recognized purposes: charitable, religious, scientific, educational and literary). Nonprofits cannot benefit the owners: all money above operating costs must be used to further the goals of the nonprofit. This allows nonprofits to operate tax-free. Approval is needed at both at the State and Federal (IRS) level.

Just like with other corporations or LLCs, a nonprofit corporation offers a corporate shield that helps protect the personal assets of the nonprofit’s stakeholders. In most cases, as long as the legal structure remains correct, stakeholders of nonprofit corporations are immune from individual liability.

6. Where should I incorporate?

You often hear of companies incorporating in Delaware, Wyoming or Nevada. That’s because Delaware offers flexible, pro-business statutes, while Wyoming and Nevada feature low filing fees as well as no state corporate income, franchise or personal income taxes.

However, as a general rule of thumb, if your business will have fewer than five shareholders, you should incorporate in the state where you actually live or where your business has a physical presence (such as an office.) When you incorporate in a different state from your physical presence, you’ll need to deal with added fees and paperwork, since you’re considered “operating out of state.” And for most small businesses, the added hassle and fees just aren’t worth it.

7. When is the best time to incorporate?

In most cases, it’s best to incorporate or form an LLC as soon as possible. After all, the main benefit is liability protection and by waiting to incorporate, you can be exposing yourself to liability.

Keep in mind that your corporation’s start date is not retroactive. This typically means filing two business income tax returns for the year. For example, if your corporation was formed on June 1, you’ll need to file as a sole proprietor (or whatever your previous entity may have been) from Jan. 1 – May 31 and then file as a corporation from June 1 – Dec. 31.

8. How can I incorporate?

There are three common methods for incorporating or forming an LLC. Each has its pros and cons, depending on your needs:

• Do-it-yourself: DIY is the lowest cost method, but you’ll need to do everything yourself. This is the best option if you’re more interested in saving money than time. With this route, you need to be able to deal with lots of details and arbitrary rules.

• Online legal filing service: This option is slightly more expensive than DIY. An online legal filing service will complete and file the documentation for you. Like any legal document, the articles of incorporation and application are full of tedious details. A professional service can make sure that your application is done right and processed smoothly.

• Lawyer: This is the most expensive option, but may be necessary in certain situations. For example, if you have complex requirements for how your stock should be allocated or you are working with millions of dollars, then you should turn to expert advice.

Whichever method you choose, you may want to speak with a tax professional to determine what business structure will be the best for your particular circumstances.

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If you’re running multiple business projects, you’ve probably wondered what’s the best way to structure all these ventures. Should you form one corporation to cover them all? Should you form an LLC for each one?

You need to answer these questions from both a marketing and legal perspective. For marketing, you need to consider the markets and target customers for each venture. Are they synergistic? Are they relevant and will they appeal to the same customer?

If so, it makes sense to market them under a shared brand. For example, it may make sense for a restaurant and side wine shop to share the same branding.

In other cases, your businesses might target different customer types (for example, the copy editor and caterer). In this case, you want to use different websites, business names and branding for each venture.

But how do you structure multiple business ventures from a legal perspective?

How to Structure Multiple Businesses

There are three ways to legally structure multiple businesses. Each option has a different set of advantages and disadvantages – and the “right” approach depends on your unique needs. Here’s what to consider:

Option 1: Create a Separate Corporation or LLC for Each Venture

You can form an LLC or corporation for each business venture. For example, you can form an LLC for a bookkeeping business and then form another LLC for selling homemade soaps.

While this seems straightforward enough, be aware that this approach will result in considerable paperwork. You’ll need to file separate forms (i.e. annual reports, meeting minutes) to the state for each structure. And if you’ve formed corporations, you’ll need to file separate tax forms for each corporation. If you’re looking to minimize your administrative requirements, consider another option.

There’s one exception to this rule and that’s for real estate investors. If you’re investing in rental properties or other real estate, you may want to consider forming an LLC for each property in order to protect each investment on its own. Then if property “A” is sued, only the assets belonging to LLC “A” are affected. Your own personal assets are shielded, as well as the assets belonging to Property B, Property C, etc.

This is the best way to contain liability in potentially risky ventures.

Option 2: Create One Corporation/LLC and Have Multiple DBAs Under the Main Corp/LLC

Your second option is to create one main company as an LLC or corporation. Once that LLC or corporation has been established, it files multiple fictitious business names, also called DBA (doing business as) registrations, for each of the ventures within the same state/county.

With this approach, each business can have the right name and branding for their specific market, while still enjoying the legal protection of the main holding company. When it’s time to file your taxes, you can take the income earned from each DBA and report them in a single tax filing under the main LLC or corporation.

Of course, situations vary and you should always consult with an attorney or tax advisor for individual advice regarding your particular situation.

3. Create One Corporation/LLC with Other Corporations or LLCs Under the Main Holding Company

In the third approach, a holding company will own individual Corporations/LLCs for your multiple businesses. This scenario often comes into play for companies that are looking to be acquired. It also applies for those cases where an established company is looking to start a new business (and the established or holding company will fund the new business).

The particular tax and legal implications can become complex for this scenario. Consult with a tax advisor and/or attorney for the best way to structure your holding company and its subsidiaries.

Final Thought

Consider this overview of how to structure multiple businesses as just a starting point. And if you’re working hard to build your businesses, make sure you’re also doing everything you can to protect them.

Multiple Businesses Photo via Shutterstock

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March 15th is the deadline for existing businesses to elect S Corporation status, making it a good time to examine this business entity.

Double taxation

You may have heard that the traditional C Corporation is overkill for most small businesses and results in higher overall tax payments through something known as double taxation. That’s because when it comes to taxes, a C Corp is a separate taxpayer that files its own federal and state (where applicable) tax returns.

This means that profits are first taxed with the corporation. Then if the corporation decides to take that profit and distribute dividends to shareholders, the dividends are taxed again (this time, on each shareholder’s personal tax statement).

The LLC (Limited Liability Company) and S Corporation are popular structures for small businesses since they avoid this double taxation burden. With these business structures, the company is taxed like a sole proprietor or partnership, meaning the company itself doesn’t file its own taxes: all company profits are ‘passed through’ and reported on the personal income tax return of the shareholders (S Corporation) or members (LLC).

If you’re interested in setting up an LLC or S Corporation for your business, you’re probably wondering which business structure is right for your business. While circumstances vary among individuals and individual businesses, here are some general guidelines to help you understand the differences and their impact on your business.

As always, you should consult with a tax advisor or CPA to discuss the specifics of your own situation:

Liability

Both the LLC and S Corp will separate your personal assets from any liabilities of the company (whether from an unhappy customer, unpaid supplier or anyone else who might pursue legal action).

Business Formality

An S Corporation actually begins as a C Corporation. After the corporation has been formed, it can elect ‘S Corporation Status’ by filing Form 2553 with the IRS in a timely manner in order to get pass-through tax treatment (more on the deadline later). This means that the S Corporation involves the formalities and compliance obligations of the C Corporations.

If you incorporate as an S Corporation, keep in mind that you’ll need to set up a board of directors, file annual reports and other business filings, hold shareholder’s meetings, keep records of your meeting minutes and generally operate at a higher level of regulatory compliance than your business might need or want to deal with.

With the LLC, this isn’t the case. LLCs just use an informal operating agreement. Think about how much formality you want to deal with. In some cases, the S Corporation can seem too burdensome for the small business or solo entrepreneur.

Shareholder Eligibility

The IRS places restrictions on who can be a shareholder of the S Corporation. An S Corp cannot have more than 100 shareholders (of course, this may not be too significant for the small business). In addition, all individual shareholders of an S Corp must be either U.S. citizens or permanent residents.

How Income is Allocated

The two structures differ in terms of how profits can be divided among the owners. An LLC gives you flexibility to decide how profits should be divvied up. But in an S Corp, income and loss are assigned to each shareholder strictly based on their pro-rata share of ownership.

Here’s an example: Let’s say you open a business with a colleague, each owning 50 percent. As the year goes on, your colleague gets busy elsewhere and you start taking on the bulk of the work. At the end of the year, the two of you decide that because you have done more work, you should keep 75 percent of the profits and your colleague gets 25 percent.

With an LLC, this type of agreement is fine. Owners simply need to agree to the arrangement and they will be taxed accordingly to their ‘operating agreement.’ By contrast, this type of flexible arrangement won’t work with an S Corporation. Because you and your colleague are each 50 percent owners, you each will be allocated 50 percent of the corporation’s income (at least when it comes to computing income tax).

Class of Stock

If you are concerned about the type of stock you can offer, take note that the two business structures are different. An S Corporation can have voting and non-voting shares, but cannot have distinctions like common stock and preferred stock. In an LLC, however, these priorities and preferences are allowed and you can have different membership classes.

When is the S Corporation Deadline?

If you’re interested in the S Corporation for your business, keep in mind that there’s an upcoming deadline to apply for S Corporation treatment. If you have an existing Corporation (C Corp) or LLC, March 15th is your deadline for filing IRS Form 2553 with the IRS and electing S Corporation status for this tax year and forward.

In other words, if your corporation/LLC existed on January 1 of this year, then you need to get your Form 2553 in by March 15, 2013 in order to have your S Corp in effect for the 2013 tax year. If you’re forming a new corporation this year, then your S Corporation deadline is 75 days from the date of incorporation.

The right business structure for you will ultimately depend on all the unique aspects of your business. But regardless of which business type you choose, taking a serious look at your legal structure is creating a strong foundation for your business.

S Corp Business Photo via Shutterstock

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Below are six reasons for you to love small businesses and continue to support small business owners in every way possible:

1. Small Business Owners Work Tirelessly

Entrepreneurs and small business owners are used to working long hours. The latest SMB Wellness Index from Manta found that small business owners are working longer hours than they have in the past. Nearly half (49%) said they worked more than 50 hours/week in 2012, compared to 40% in 2011 and 26% worked up to 60 hours a week in 2012, 14% worked up to 70 hours, and 9% admitted to working more than 70 hours a week.

2. Small Businesses are the Heart of the American Economy

If you had any doubts about the importance of small businesses to our economy, take a look at the following statistics from the U.S. Small Business Administration (SBA). Small firms:

• Make up more than 99.7% of all employers.
• Create more than 50% of the non-farm private gross domestic product (GDP).
• Make up 97% of exporters and produce 29 percent of all export value.

3. Small Businesses Spurs Job Growth

It’s the small business engine that’s turning our economy around and putting our country back to work. The latest figures from the SBA show that small businesses create 75% of new jobs in our economy, creating more than 15 million new jobs between 1993 and 2009. Small businesses employ half of all private sector employees and hire 43% of high tech workers (scientists, engineers, computer programmers, and others).

4. Small Business Owners are Gutsy 

The bulk of small businesses are self-financed, with owners digging into their savings, home equity, stocks, 401k/retirement accounts, and credit cards to fund their business. The large number of bootstrapping startups is, in part, due to a tighter lending market. Most small business owners find they need to sign a personal guarantee in order to get a loan.

This kind of bootstrapping makes a small business self-reliant, but it’s also risky as owners may stand to lose their entire wealth if the business fails. Yet despite this fact, small business owners are ready to take the plunge because they believe in their vision and want to do whatever they can to make it happen.

5. Small Businesses Build Relationships 

As the founder of a small business, I enjoy doing as much business as I can with fellow small companies. Small businesses often share a uniquely genuine culture – after all, small business owners typically have a closer connection to their customers and marketplace. There are fewer bureaucratic layers and armies of consultants standing between the owner and customer. Smaller organizations take a vested interest in the needs of their customers, and build strong relationships with their customers and community.

6. Small Business Owners are Optimistic

2013 brought a flurry of small business surveys all pointing to increased optimism for the coming year. The SMB Wellness Index from Manta found that more than 75% of the small business owners polled are confident about their company’s growth prospects in 2013. A Dell Think Tank poll showed that business owners in their six markets expect their finances and sales to improve this year. And the American Express OPEN Small Business Monitor found that 77% of small businesses polled are optimistic about their business prospects.

While these findings are certainly indicative of positive trends in our economy, I think that by nature, small business owners are an optimistic group. It’s an unfailing belief in themselves and a hope for the future that gives entrepreneurs the strength to take risks.

I hope more courageous and creative individuals join the ranks of small business owners in years to come.

Pastry Business Owner Photo via Shutterstock

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Franchising can be less risky than starting a business from scratch. The franchisor has done a lot of the work for you. The business plan is ready made; there’s already strong brand name recognition, and the franchisor is often responsible for the marketing and advertising.

However, any new business is risky, even a franchise. You may get an established name and business plan, but your success is ultimately up to you.

If you are considering taking the leap to become a franchisee this year, here are five tips:

Do Your Research

Whether you identify a potential franchise opportunity from a franchise broker or franchise exposition, you alone are solely responsible for the due diligence before you invest. Start by reading the Franchise Disclosure Document (FDD) to find out important details about the franchise company, litigation and bankruptcy history, as well as your initial fees, investment, and obligations.

According to franchise expert and consultant Joel Libava, potential franchisees should:

“Make sure they find out exactly what their role will be as the Owner. Don’t base it on what you see in a beautiful franchise brochure. Ask the existing franchisees what their day is like…what they do as the owner.”

For Libava, it’s critical to speak with other franchisees before signing on the dotted line. Ask existing franchisees about the total investment:

• Was their investment in line with what was stated in the FDD?
• Ask how they went about getting a loan for their franchise. Was it pretty easy, or was it challenging?

Maybe they can introduce you to their lender and you can get a similar small business loan from them. Lastly, Libava says:

“Ask every franchisee this question: Would they do it again?”

Think About Your Location

Successful restaurant and store owners will tell you it all comes down to location, location, location. One of the toughest, and most important, decisions a franchisee will make is choosing a location for their new business. Many franchisors will work closely with you to pick the perfect site, sharing insights about what particular site characteristics lead to success with their organization.

However, at the end of the day, the decision is ultimately yours. You’ll need to understand your target demographic and what drives customers to this particular franchise. Then evaluate each location accordingly. Consider details like traffic patterns, parking, nearby stores, and check with the franchisor if you’ll be guaranteed protected territory (i.e. no other franchise can open within a certain radius).

Focus on Service

Buying a franchise gives you a proven model and a clear-cut marketing plan to bring in new customers. However, it’s up to you to define the customer experience. Employee-customer interactions can make or break any business.

Hire customer-centric staff who will go the extra mile to leave an extraordinary impression on your customers. In addition, you need to be realistic about your management experience. If you have never managed a team before, you’ll need training on how to manage people effectively.

Consult a Specialist

The tax rules and contracts surrounding franchises can get quite complex. You should consult an attorney, preferably one who specializes in franchise law, to review your franchise agreement documents and identify any potential red flags.

In addition, an accountant can help you understand the full costs of purchasing and operating the business, as well as evaluate tax considerations. Given the size of the investment you’ll be making, it’s prudent to pay a little upfront for a professional consult.

Don’t Forget About a Formal Business Structure

For franchisees, a formal business structure (like a corporation or LLC) is critical to separate your personal assets from the business. While the exact business structure you choose will ultimately depend on the specifics of your situation, many franchisees choose to become an LLC or S Corporation for more favorable tax treatment. These two entities give you the option to choose pass-through tax treatment. In this case, your business doesn’t file its own taxes; any profits or losses of the business are passed through to your personal taxes.

Many franchisors prefer to sign contracts with established companies (LLC or corporation) rather than sole proprietors, so you may want to incorporate or form an LLC before you sign the franchise agreement. In most cases, you’ll want to incorporate or form an LLC in the state where your business will be located (and not the state where the franchise is headquartered). While you may want an attorney to review your franchise contract and paperwork, you don’t necessarily need an attorney to incorporate.

Other Resources

If you’re interested in exploring a franchise opportunity, there are plenty of resources to help you get started:

Bureau of Consumer Protection: “Buying a Franchise: A Consumer Guide”

Small Business Development Center (SBDC)

International Franchise Association

World Franchising

Browse for opportunities and do your homework. Maybe this will be the year you take the reigns and become a business owner.

Franchise Concept Photo via Shutterstock

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Here’s a checklist of some of the top questions to ask to get your small business fit in the New Year:

1. Do you understand this year’s tax changes?  

Each year always brings changes to the current tax law and the end of 2012 brought a roller coaster ride full of changes. The payroll tax holiday expired at the end of 2012. Marginal tax rates (for individuals) remained the same for most taxpayers, but were increased for those single filers with taxable income over $400,000 and married filers over $450,000.

In addition, there are changes to health savings account and retirement contributions, AMT exemptions, and more.

While it has always been smart to meet with a tax advisor or CPA at the beginning of any year, it’s practically imperative this year given all the changes to business and personal income tax law.

Education is your best tool to optimize your tax position. By meeting with a tax advisor as early in the year as possible, you’ll be in a better position to act on his or her recommendations.

2. Are you still operating as a sole proprietor? 

Don’t be ashamed if you’ve been conducting business as an individual. Many small businesses start out as sole proprietorships or partnerships, and then eventually transition to a formal business structure. If your business is not incorporated, you may want to consider filing your corporate formation paperwork this year to establish your company as a separate business entity from you as an individual.

Once incorporated as a separate entity, your company may be entitled to claim tax deductions that you could not as an individual (discuss these options with your tax advisor or CPA). In addition, a corporation or LLC structure can help shield you from personal liability when your business is sued or can’t pay its debts.

3. Have you registered your business name? 

If you aren’t ready to incorporate your business yet, that’s okay. But you should at least register your business name with the state. This simple step is known as filing a DBA (Doing Business As or Fictitious Business Name). By filing a DBA with the state, you are legally able to use a business name. And best of all, you make sure that no one else can use your business name in your state.

Bear in mind that while filing a DBA or incorporating will protect your name in your state, these actions alone may not be enough to stop someone from using the same business name in another state. If protecting your brand across all 50 states is important to you, consider filing for trademark protection this year.

4. Are you expanding to another state?

If you have plans to expand into another state this year, don’t forget you’ll need to file for a foreign qualification in order to legally conduct business outside your home state (or the state where you incorporated/formed an LLC).

For example, if you operate a restaurant in Florida and decide to expand into Georgia and South Carolina, you’ll need to file a foreign qualification in both Georgia and South Carolina. Or, if you’re a consultant living in Washington, but are going to be conducting the bulk of your work (and meeting with clients in California), you may need to foreign qualify in California.

5. Are you on top of your record keeping? 

In order to understand the financial health of your business, you’ll need to get a hold of exactly how much you’re taking in and spending. In addition, you’ll need accurate and comprehensive records in order to make the most of your business tax deductions and prepare yourself in case you’re ever audited.

If you have found yourself struggling with this tax in the past, look for a new solution. Whether it’s outsourcing the task to someone else (like a professional bookkeeper), investing in a new technology tool (like a receipt scanner or cloud-based accounting app), or just resolving to dedicate 30 minutes each week to catch up on your expense tracking.

6. Have you evaluated your employees from a legal perspective lately?

If your business employs any full-time employees, part-time employees, or contractors, you should make sure your records are up to date and you are operating by the book.

For starters, make sure you have the current mailing addresses and correct Federal ID numbers for all employees and any vendors/contractors that you’ll be giving a 1099 to. If you’re employing 1099 contractors, you should make sure that they meet the terms for an independent contractor and should not be classified as an employee.

The Small Business Association outlines the differences between contractor and employee. If you have full-time employees, it might be wise to talk to an employment law attorney to make sure you are in compliance.

7. What’s the copyright date on your website?

Don’t be a year or two behind. If the copyright year at the bottom of your website still displays a previous year – now’s the time to update it.

Final thoughts

The new calendar year is an ideal time to get your legal foundation squared away to support you for years to come. Don’t let daily interruptions keep you from doing something that is fundamentally crucial to your business’ long-term health and to the security of your finances.

Here’s to a prosperous and productive new year!

Checklist Photo via Shutterstock

The post Your New Year Small Business Checklist appeared first on Small Business Trends.

In light of this yearly tradition of creating lists, here are five attainable new year business goals for the small business owner:

1.  Delegate More

When you’re just starting out with your business, money is usually tight and it’s natural to want to tighten your purse strings.

However, small business owners are also notorious for having trouble handing over the reigns. Trying to take care of everything yourself can be harmful to both your well being and your business. With only one person in charge of the whole show, there’s only so far you can scale.

This year, consider tasks that you can delegate down, such as the countless tasks that are easy to do and don’t require specific expertise. If you’re worried about costs, just remember how much of your valuable, revenue-generating time you’ll be freeing up.  Your business can’t grow when you’re focused on busy work.

In addition to delegating down, think about areas of your business that you should delegate up. These are the tasks that require special knowledge and skills and ones not related to the core wheelhouse of your business.

While DIY may seem easier on the wallet in the short term, it’s typically better in the long run to hire a specialist to handle complex issues, such as an accountant for bookkeeping or taxes or an expert for handling your legal paperwork like incorporation.

2. Get Your Books Ready for Tax Time Early This Year

Are you guilty of waiting until the last minute to organize and file your taxes? Do you find yourself wading through emails, drawers, and your car to find any stray business receipts you can expense? Do you need to try to remember a full year’s mileage expenses on April 13th?

Don’t wait until April to start on your tax forms this year. Start fresh by organizing your books from day one of the new year and start gathering what you need for your prior year’s taxes now (even if that means outsourcing your accounting or signing up for a new cloud-based application).

3. Protect Your Assets with an LLC or Corporation

While legal fine print isn’t the most exciting part of running a business, forming an LLC or Corporation can be critical to your business and personal financial health. These business structures protect your personal assets from any liabilities of the company.

This means that if your business can’t pay its debts or happens to be sued, your own personal property may be shielded from any judgment. In addition, these formal business structures can improve your tax situation and carry other benefits that you may want to discuss with your CPA or tax advisor.

If you’re not quite ready to take the plunge to incorporate, you should at least register your business name with the state. This simple step is known as filing a DBA (Doing Business As or Fictitious Business Name) and it does two things:

• It makes sure that you’re legally able to use a business name.
• Ensures that no one else can use your business name in your state.

4. Put Your Customer First

As a small business owner, you know you wouldn’t be anywhere if not for your customers. As you move into the new year, put your customers first in all that you do. A small business can stand out in a crowded market by offering impeccable, personal, and customer-centric service.

Treat your customers as people, not numbers or sales figures. Listen to your customer’s needs and bend over backwards to make them happy.

5. Set Aside Time for Yourself

As an entrepreneur, you probably suffer from little separation between your personal and work life. This year, make a point to set aside time for yourself each and every day. Go to the gym, do something you enjoy or just turn off your phone and other devices for a half hour each day.

It’s important to recharge your batteries in order to stay focused and motivated throughout the year. A change of scenery can stoke your creativity. Who knows what brilliant plan you’ll dream up when you step outside your daily grind.

Sticking to a goal is tough for anyone. The most important thing is to create realistic ones that make sense for you and your business. What are the goals you’ve set for your business in the new year?

Goals Photo via Shutterstock

The post New Year Goals for Small Business Owners appeared first on Small Business Trends.

A small business owner’s life can be a real roller coaster. There’s no road map, and pitfalls lurk around every corner. While making mistakes may be a great way to learn, it’s a lot better to avoid them in the first place.

Having started a few businesses in my career, and having helped thousands of small businesses launch across the country, I thought it would be useful to highlight some of the hard-won experience I’ve learned throughout the process.  Below are 7 deadly sins for starting a small business:

1. Don’t Underestimate a Business Plan

If you’re launching a small business and aren’t planning on pitching investors, it’s tempting to skip the step of writing a formal business plan. However, taking the time to write out your business plan, forecasts, and marketing strategy can be a particularly effective way to hone your vision.

Your planning should center around a few essential questions:

• How is my business serving a particular need or pain point?
• Does this represent a major market opportunity?
• How much will it cost to ramp up the business?
• When can my projected revenues support the spending?

In addition, don’t overlook your exit strategy at the beginning. Do you want your children to take over the company? Do you want to sell it? It’s critical to think about these questions from the start, as the building blocks of your company (such as legal structure) should vary depending on your preferred final outcome.

2. Don’t Incorporate as the Wrong Business Entity

Your business’ legal structure affects the amount of taxes you pay, the employee benefits you can offer, the amount of paperwork you deal with, and more. In the U.S., the three most common business structures are:

• LLC (Limited Liability Company)
• S Corporation
• C Corporation

All three entities protect the personal assets of the owners from the liability of the company, yet differ when it comes to tax treatment and more.

Here are some common mistakes made by small business owners. You may want to consult a tax advisor or CPA on what structure would be best for your particular situation:

• A small business owner creates a C Corp for her business, then discovers what ‘double taxation’ means when she has to file taxes for both her business and personal taxes. Her CPA advises her to elect for pass-through S Corp treatment to avoid this next year.
• Two friends form an S Corporation for their new business. However, they’re stuck paying taxes in direct proportion to their ownership, even though they’ve actually arranged to allocate the profits 75-25 the first year since one was responsible for significantly more work. Instead of the S Corp, they should have formed an LLC where they can have more flexibility when it comes to dividing the profits and their taxes.

Of course, the biggest mistake a small business owner can make is failing to create a legal business entity at all.

3. Don’t Pick Delaware or Nevada for the State of Incorporation if you Don’t Live There 

Many business owners think they should choose among Delaware, Wyoming, or Nevada when incorporating or forming an LLC. And yes, these are popular states for incorporation in the U.S. because of low filing fees and pro-business statutes.

However, these two states aren’t necessarily the best choices for every business. For the small business (defined here as one with less than five shareholders), it’s better to incorporate in the state where there’s a physical presence, meaning where you live or have an office. Otherwise, there can be too many hassles associated with operating ‘out of state.’ These include:

• Difficulties opening a business bank account
• Having to appoint a registered agent
• Fees for operating as a ‘foreign entity’ in your own state

4. Don’t Underestimate the Importance of a Business Name

A business begins with a name. It’s the cornerstone of company identity and shapes all that follows. Think about what’s important to you and your business. What’s the first thing you want a customer to think about with regard to your business?

For example, a young company breaking into the financial advising field may be more concerned about credibility and thus forgo the edgy, attention-grabbing name.

It’s smart to check that a business name is available to use before you order your business cards, as you don’t want to be on the wrong end of a trademark dispute. In most cases, you don’t need an attorney to check if your name is available; you can perform these easy steps on your own:

• Perform a free search online that looks at business names registered with the secretary of state in the state where you’re located
• Then take your search to the next level and conduct a free trademark search to make sure your name is available in all 50 states

5. Don’t Fall Into a Discount Trap

At the beginning, too many young companies feel the pressure to heavily discount their prices in order to win business. While customer acquisition is important, attracting customers at unsustainable price levels will just result in a race to the bottom. I’ve learned that you’re better off in the long run focusing on how to bring more value to customers, rather than simply slashing your prices.

6. Don’t Go Against Your Intuition

Intuition is a critical part of the decision making process, and it’s just as important in business as it is in other areas of your life. Business deals depend on relationships, whether it’s with partners, employees, vendors, or clients. You need to get a read on other people you’re involved with – and then trust your gut (even if the numbers are telling you otherwise).

7. Don’t Be Afraid to Fail

Lastly, if you’re scared of failing, you’re probably playing it too safe as a business owner. Failure is practically a rite of passage for successful entrepreneurs. Valuable lessons can be learned through the experience…lessons which you would never learn from a business class.

Soccer coach Sven-Goran Eriksson once said:

“The greatest barrier to success is the fear of failure.”

If you find yourself nervous about what might happen, think about all the opportunities and possibilities you leave behind by not ever trying. Trying (no matter what the outcome is) is your first step toward success.

Seven Photo via Shutterstock

The post Starting A Small Business: 7 Deadly Sins appeared first on Small Business Trends.