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When starting a business, there is as much that we don’t know as there are things we’re certain of. We have a pretty good idea of what we want to accomplish, and a notion of how we want to get there, but for first-time entrepreneurs, there is often a raft of questions that are unanswered that can also go unasked. Part of that is the same fear that prevented many of us from raising our hands in school: the fear of looking foolish, unintelligent, or uninformed in front of others. But another part of it is that many new founders aren’t sure where to start with their questions or even the right questions to ask.
In this series, I’ll tackle the biggest questions entrepreneurs should be looking to ask at various points in the life-cycle of their business and highlighting some of the unknown facts or aspects that otherwise go overlooked.
One of the first and most important questions facing many a founder is, “How do I get started turning my idea into a business?” It’s a big and broad question, and answers can range from the practical to the philosophical. Experts weigh in on how to approach and think about your fledgling enterprise if you want it to become your full-time occupation. For the purposes of this piece, I’ll be focusing on one very tangible first step that every founder should tackle at that outset: business formation.
Creating a business entity can seem daunting, and it’s easy to put it off while you’re still in the stage where your idea is turning over in your mind. But as soon as you’re ready to make that idea a reality, you need to create an entity for your business. A business entity is a foundation to build your company on; it allows you to operate and pay taxes as a business, protects your personal assets in cases of liability, and eventually will allow you to fundraise. In short, you’re going nowhere without a business entity.
At the outset, you can choose if you want to operate your business as a sole proprietorship, a partnership, or a limited liability company (LLC). Sole proprietorships don’t require any formation but aren’t a separate business entity, meaning that your personal assets aren’t protected from your business liabilities. So really it’s not a choice. Partnerships can be structured as either limited partnerships or limited liability partnerships, depending on how much risk each partner wants to be exposed to and how much control each should be granted. An LLC allows parties to protect their personal assets against liability in most cases, and allows for profits to be passed through to your personal income without having to pay corporate tax; however, LLCs might have to be dissolved and reformed as members join or leave, so be aware if you’re considering changes to ownership or partnership down the line.
Incorporation in an option that allows you to keep your business assets and liability entirely separate from your personal finances, although corporations are more costly to form and have a greater onus when it comes to recordkeeping and reporting. The two most common types of corporations are the basic corporation, called a C-corp, and the S-corp, which offers some different benefits and some unique limits that the C-corp doesn’t share. While both entities can bring in revenue, S-corps are able to avoid taxation, including double taxes in some cases, [aid by C-corps, by allowing profits to be passed to the personal income of its owners. S-corps are also limited to 100 shareholders, whereas C-corps have no such limitation. There are also options for a benefit corporation (B corp), a close corporation, or a nonprofit organization, although all three fit in a more narrow scope than the average for-profit business. In any of these cases, it’s best to consult with a business attorney to make sure that you’re making the correct decision and avoid any mistakes on the paperwork.
Creating a business entity isn’t the end of the work necessary to get your business established on a firm footing; it can be considered the first step on a path to the marketplace or turning onto the on-ramp that takes you to the highway. There’s still work to be done across every area of your business, and miles to go before you sleep. But taking that important first step in the right direction should give you the confidence to move forward knowing that your business can be on a solid foundation. #onwards.
June 4, 2019 at 09:18AM
Forbes – Entrepreneurs