Do you own a business? Do you want to ensure all the hard work you put into the business while you are alive isn’t lost after you pass away? If so, you need to invest in business planning.
However, business planning isn’t just for what happens to your business in the future. It also ensures you have a successful and profitable business while you are alive.
Choice of Entity
When you begin planning for your business, one of the first things you must decide is the type of business entity you want. There are four main types to choose from. Learn more about each one here.
- Sole Proprietorship: This is a business that has a single owner and is considered the “default” form. If you don’t take any other action, your business is considered a sole proprietorship. With this type of business, it is intertwined and identified with you – the business makes a profit – you make a profit and vice versa. A sole proprietor is personally liable for the debts and liabilities of the company.
- Partnership: This is as the name implies, a business owned by two or more people. These work best when there’s a clear division of abilities and responsibilities. Also, they can infuse the business with more capital. There are several types of partnerships depending on your needs.
- LLC: A limited liability company offers limited liability to its owners (like a corporation) and the option of pass-through taxation (like a partnership).
- S-Corp: With this classification, income “flows through,” and the net income is reported on the shareholders personal tax returns. S-Corps also have restrictions on who can be a shareholder and the number of shareholders.
- C-Corp: This is considered the “standard” corporation and all companies found on the stock exchange are classified as this. The disadvantage of this is double taxation, meaning that the corporation is taxed on income that is earned by the company, and then shareholders are taxed when income is distributed to them.
There are advantages and disadvantages to each type of entity. Make sure you know the differences before you choose to set up a business entity.
The Operating Agreement and Bylaws
An operating agreement is a contract between the owners of an LLC or a partnership. It dictates the relationship between the parties. Operating Agreements typically address, among other things, how new owners are admitted to the company, how profits and liabilities are split between the owners, and voting rights among the owners. Although operating agreements are not required in all states, you will be subject to the default rules of state law if you don’t have one.
Corporate bylaws, on the other hand, provide structure to a corporation and ensure it runs smoothly. Bylaws are approved by the Board of Directors and are for the benefit of the entire organization. The rules contained within the bylaws outline the operating procedures for everyone from the shareholders and executives to the employees.
Termination and Succession Planning
If you work your entire life to build a successful business, the last thing you want is for it all to fall apart – or be taken from your family – after your death. With succession planning, this is a non-issue as it will dictate what happens upon your passing.
If you need to create a plan for your business, the best thing you can do is contact a professional like The KC Estate Planner. They can evaluate your business and ensure you are prepared for the future.