Success of FailureWritten by Austin Akalanze
“Failure is an orphan”How lonely it feels when we fail! Even amongst peers we feel lonesome How it hurts, I know too well! What is bad is not that we failed But that we failed and not Take away a new learning Every failure is a stepping stone
| | WHAT IS THE BEST ENTITY?Written by Garrett Sutton, Esq. and Kathy Spitzer, Esq.
It's probably most frequently-asked question that we hear from entrepreneurs, both experienced and those just getting their feet wet. So, we've put together this report to help you make that selection. Hopefully this information will allow you to make a more informed decision about entity that is right for your business. But don't despair if you don't see your business fitting into any of models set out below -- we also offer a service where your business structure is reviewed and you are provided with our opinion as to best entity in your situation. And, because in many cases, company structure you choose will be based on how it will pay taxes, our top-level review will have your business plan run past a CPA, to make sure all of your options are reviewed. We can also review your existing business structure and offer our suggestions for maximizing your strategy. A review of entities follows: Sub-Chapter "S" Corporations ("S Corp") An S Corp is a great entity for a beginning business that: • will provide a service; • does not have significant start-up costs; • will not need to make major equipment purchases before beginning operations; • will make a sizable amount of money without a great deal of effort and expense; and • expected growth of no more than 75 shareholders, who will all be people who living in United States or who file a U.S. Resident tax return. An S-Corp is structurally same as a C corporation (i.e., it has officers, directors and shareholders), but with one key difference. An S Corp files an election with IRS, called a Form 2553, that provides it with a flow-through tax structure as found in entities such as partnerships and limited liability companies. That means, company's income (and corresponding expenses, write-offs and deductions) will flow through to its shareholders, and be split among them according to each shareholder's ownership percentage. The S Corp's taxes will actually be paid by its shareholders, at their individual tax rates, and in proportion to their individual ownership percentages. From a taxation standpoint, an S Corp is a great fit for a company that offers a service, because in many cases revenues can be split and paid to shareholders in two categories: salary and passive earnings. A flow-through tax structure means that profits and corresponding losses, deductions and expenses are divided up among shareholders, in proportion to their ownership percentages, and reported on each shareholder's personal income tax return. Therefore, if your income from an S Corp is split into two streams, salary and passive, each stream will be taxed differently. Your salary stream will be subject to both income tax and payroll taxes such as medicare and social security. However, passive income stream will be subject only to income tax. So, by taking a reasonable salary from S Corp your tax bracket would be lower than if you were take your entire share of earnings as salary, and remaining share would flow through to you as passive income, and would also be taxed at this lower rate. An S Corp is also a great entity for businesses with low start-up costs, that do not have to purchase a significant amount of assets to begin operations. For example, buying a working laundromat would be an excellent choice for an S Corp. You are purchasing a turnkey business - it's already operating, and you aren't going to be laying out significant cash to get it up and running. So, you will have a pretty good income stream immediately, and that income stream can best be disbursed to you and your partners, if any, through S Corp structure. Two other great matches for an S Corp are network-marketing and Internet-only businesses. In each case, business is likely to have no storefront, low operating costs, and probably doesn't maintain a warehouse. Most network marketing and Internet-only businesses drop-ship from their suppliers directly to end consumer when they are delivering products at all. Again, as these can be high-income, low cost operations, they work great in S Corp structure. Here's another reason we suggest S Corps for many service-oriented businesses -- To avoid being characterized as a Personal Service Corporation, or "PSC" by IRS. PSCs are C corporations that are classified by IRS as providing a service, such as consulting, to general public. Now, as you may know, United States government, in an effort to boost economy and keep business working, assesses C corporations with a pretty low initial rate - 15% on earnings up to $50,000. That's quite a bit lower than you would pay personally, if you were receiving that same $50,000 as salary. And, that 15% rate is also lower than you would pay if your business was an S Corp. So, to head off anticipated
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