All things Sole Proprietor and Partnerships

Imagine: you have surpassed gifting your homemade jewelry to friends and family and have bravely decided to take your talents to Etsy. As an individual starting your own business, there are many considerations to take into account — the first being the opportunity to register your business under a specific entity, such as a Corporation or Limited Liability Company (LLC). Reasons you may consider one of these entity types depend on your preferences regarding taxation, legal protection and control of the business. (More on entity types here). If you opt out of incorporating or registering as an LLC, then your business is a Sole Proprietorship.

A “Sole Proprietorship” may sound complicated, but it’s nothing more than jargon for an individual who owns a business and is personally and solely liable for its debts. Running your jewelry business may require buying materials, maintaining and promoting your Etsy shop, and eventually hiring an employee or two to manage orders. As a Sole Proprietor, you are personally responsible for these costs, as well as any debts incurred while operating your business.  

Other cornerstones of a Sole Proprietorship

  1. Sole Proprietorships are easy to set up and can cost significantly less to maintain than other entity types. Other than an EIN/Tax ID, Sole Proprietorships don’t require additional formation by the state or IRS.
  2. Sole Proprietors tend to run small or part-time businesses and typically have few or no employees.
  3. As a Sole Proprietor, you are 100 percent liable for any and all business debts. If the business goes south, you open yourself up to lawsuits that, if won, will jeopardize your personal assets. For example, if someone sues your business and wins, they can go after your home.  
  4. A Sole Proprietorship is recognized as a legal entity and but is legally and financially indistinguishable from its owner. This means you must report the net profits or losses of your business on your personal income taxes (known as “pass-through taxation”). In addition, you are required to pay a self-employment tax of 15.3 percent to the federal government.
  5. However, Sole Proprietorships offer unmatched flexibility. You have unlimited control over your business, its proceeds and its resources.

It’s important to note that a Sole Proprietorship is owned by one person and one person only. Unlike other entity types, Sole Proprietorships cease to exist when the business owner dies, retires or decides to sell the business. If and when a Sole Proprietor offers partial ownership to another business or person, the company will no longer be treated as a Sole Proprietorship but as a Partnership.

General Partnership

If you share ownership of your business with at least one other person, you are considered a General Partnership. Similar to a Sole Proprietorship, a General Partnership also offers pass-through tax liability, low cost of formation and flexibility, but all members of a General Partnership remain personally liable for the debts and obligations of the business.

The 411 on EIN

Regardless of your entity type, you will need a unique number — known as an Employer Identification Number (EIN) or Tax ID — to identify your business to the government and the IRS. In some cases, you are able to use your Social Security Number (SSN) to identify your Sole Proprietorship; however, if you plan to hire employees, establish payroll, open a bank account in your company’s name or acquire credit, you will need an EIN/Tax ID. Even if you don’t need one today, there’s no harm in applying for an EIN and having it available should you need to do any of the aforementioned tasks. It also comes in handy when trying to conceal your personal SSN on invoices and other business forms.

Note: Individuals are only allowed one Sole Proprietor EIN/Tax ID in their lifetime. If you applied for/received a Tax ID but no longer need it or would like to get a different EIN for another purpose, you will need to cancel the original EIN with the IRS.

What’s in a name?

As a Sole Proprietor, the legal name of your business is your name — exactly the way you listed it on your Tax ID application. The legal name of a Partnership is the name provided by the owner(s) for state filings. You have the option of filing for a fictitious trade name or a DBA (“Doing Business As”), which allows you to choose a different business name you wish to be recognized by. It can even be required for business bank accounts opened for Partnerships if you want all partners to have access to the account. Whichever name you choose, you will need to file the appropriate forms with the county in which you are conducting business.

If you’re still unsure whether or not your business qualifies as a Sole Proprietorship, Partnership or something else, take our quick survey to determine your entity type.

 

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.


Intellectual property: protecting your most valuable asset

In the modern age, intellectual property assets are usually among the most valuable of a company’s holdings. Thirty years ago, a company might value its physical property, manufacturing equipment, inventory or even a sought-after lease as its most valuable assets. Today, in a highly specialized global economy connected by the internet, many of those previously highly valued assets can be rented, hired out or have been rendered unnecessary altogether.

Most businesses today stake their fortune on their intellectual property, whether they realize it or not. If your company owns any of the following assets, and they almost certainly do, you’ll want to ensure they’re appropriately protected.

Patents

A patent is the right to the exclusive use of an invention. Most companies are well aware of their patents and pending patents, as they are the most obvious type of intellectual property. However, many entrepreneurs are not aware that they need to consistently protect their patent in order for it to retain its value. Have conversations with your patent attorney early on regarding how best to protect your patent in your particular industry. Make sure that your employees and independent contractor agreements contain sufficient language to assign all patentable inventions to your company.

Trademarks

The name “Coca-Cola” itself is more valuable than anything the company owns, a fact that won’t surprise many. But even for a small business, the goodwill it develops by treating customers and employees well and/or delivering a good product or service is inextricably tied to the company’s name. Change it and a loss of customers would likely ensue. Without the name recognition, even recruiting could take a hit.

So how do you protect a name? Before you even choose a name, you should conduct a thorough trademark search or have a lawyer do one for you. I worked with one client who had invested a substantial sum in a public relations firm to build his brand only to have to abandon it a year later because of a trademark dispute. Second, you should file a trademark application. While it’s not necessary to register your trademark in order to claim ownership of it, it does increase you success of prevailing against a competitor. It also increases the damages available to you should another company infringe upon your name.

Copyright

Copyrights protect original works of authorship and can include books, music, articles and even website copy. Businesses today tend to invest significant sums building out their websites, developing copy, and perhaps even publishing blogs. Like trademarks, you own a copyright in your work even if you do not file a copyright application. But also like trademarks, you will find yourself in a more defensible and protected position by registering a copyright and using cease-and-desist letters (a document sent to an individual/business to stop purportedly illegal activity and not to restart it) any time you discover an infringer.

Trade secrets

Trade secrets can encompass any number of things, from customer lists to recipes to marketing strategies and beyond. Most companies are not even aware of the entirety of trade secrets they possess. The second prong listed above — requiring efforts to maintain secrecy — is quite difficult to do if you’re not aware of your own trade secrets!

For this reason, it can be beneficial to have a lawyer run a trade secret audit. From there, you should develop written policies to protect those trade secrets, including cyber security efforts, as well as the consistent use of non-disclosure agreements (NDAs), employee confidentiality agreements and confidentiality terms in vendor or joint venture agreements.

You take steps to protect your physical property with fences, locks and security systems, but your intellectual property is arguably worth even more. The success of many businesses — big and small — lies largely on their ability to acquire, create and protect intellectual property. Small steps — such as the consistent use of confidentiality agreements and the identification and pursuit of infringers — can make a critical difference in the success of your company.

 

About the author

Heather Orr Headshot

Heather Orr is an accomplished business law attorney who, after many years as a litigator, built a practice dedicated to keeping small businesses and startups out of the courtroom. She has served the entrepreneurial community through her firm, HSO Law, since 2009. Heather also served as an adjunct law professor at Loyola Law School for three years, where she taught a course on business planning, and is the author of How to Like Being a Lawyer.


Navigating credit card payment processing

For a majority of Americans, the days of carrying wads of cash or writing out a check to pay for purchases are long gone. Even debit cards are taking a back seat to the credit card due to the endless variety of points, bonuses and travel incentives it offers users.

We are far from becoming a cashless society, but if your business doesn’t accept payment via credit cards, you’re missing out on a lucrative opportunity to increase both the volume and sum of your sales. In general, customers are more likely to make a purchase — and spend more on that purchase — when they’re able to pay with a credit card.

You may be wondering, why doesn’t every business accept credit cards? The answer is that by doing so, the business owner must fork over a percentage of each purchase to middlemen, which typically consist of a payment card company that processes the transaction, a credit card association (ex. Visa, MasterCard, etc.) and a credit card issuer (i.e. the bank that issued the card). For some small businesses, especially those that sell a high volume of lower-priced items, these ‘convenience’ fees can add up quickly and cut in to their profit margins.

While processing fees for credit cards are unavoidable, merchants can keep these costs low by choosing the right pricing model for their business and negotiating better rates based on volume of transactions. Below is a breakdown of the four most common pricing models for credit card processing. (Note: While reading, keep in mind that many markup fees are negotiable, while wholesale fees are not.)

  1. Interchange Plus

Interchange Plus is the most common pricing model — and the most transparent. The “Interchange” portion of this model refers to a wholesale fee charged by the credit card association (Visa, Discover, etc.) for every wholesale purchase. These fees are set up by each credit card association as a fixed rate; generally, the greater the rewards of the credit card, the higher the fixed rate will be. This is because the credit card association has to pay for the rewards earned by card members. It’s also the reason why businesses often refuse to accept a specific credit card — because it’s simply too expensive and not worth the ROI for the business owner.

The “Plus” portion of this pricing model refers to the credit card processor’s markup (either a percentage of per-transaction fee) that is applied to each credit card transaction. The true cost will depend on the markups, but Interchange Plus typically offers substantial savings compared to other pricing models. Additionally, wholesale fees and markups are itemized and listed on your monthly statement, so you know exactly what you’re paying for.

  1. Subscription

With a subscription-based pricing model, the credit card processing company charges a small fixed cost for each transaction, rather than a percentage of sales volume (as in the Interchange Plus model). In addition, the business owner will pay a flat monthly subscription fee in order to take advantage of the fixed-cost perk.

This model is the only pricing structure where a processor’s markup is not based on a percentage of sales, making it a great option for companies with large ticket items. Because the subscription fee is separate from the per-transaction fee, this structure also offers a good deal of transparency for the business owner. It’s important to note that many of these membership models cap the number of transactions that can be processed at each membership level; if you process more than that amount, the price of your monthly membership may increase.

  1. Tiered

Tiered or “bundled” pricing plans categorize each credit card transaction into one of three categories — qualified, mid-qualified or non-qualified. Credit card processors will charge a different fee for each transaction based on which category it falls within. Fees are the lowest for qualified purchases and increase for mid-qualified and non-qualified transactions.

What makes a purchase qualified versus mid- or non-qualified is the type of credit card used to make the transaction. Factors such as the brand of the credit card, whether it’s a private or business card and the types of rewards it offers play a role in which tier the transaction falls in to.

This option — while currently the most common pricing model — can be inconsistent, nontransparent and expensive. Processors don’t often disclose which tiers transactions are falling into, concealing the real cost. The amount of money paid in fees by a business owner can vary greatly each month, depending on the type of sales completed during that timeframe. Additionally, business owners don’t get to decide which credit cards their customers use, so they have no choice but to pay a greater fee every time a customer pays with a card that does not fall into the qualified tier.

  1. Flat Rate

The flat rate pricing model is similar to tiered pricing — but without the tiers. All transactions incur the same blended fee, somewhere around three percent, regardless of the cost of the purchase. Some processors also charge a small per-transaction fee, but most of the cost comes from the blended fee, which is typically more expensive than other models. However, most processors (especially PayPal, Venmo, Stripe, Square, etc.) do not charge a monthly fee. Flat rate pricing may be right for low-volume or low-ticket businesses, or if a majority of your customer base takes advantage of or is willing to use a service like PayPal or Venmo. By working with these processors, you can get approved online and take credit within about 10-15 minutes.

To accept or not to accept…

The credit card industry has changed over time; today there is more transparency, and merchants are getting smarter about their options. We recommend educating yourself on different rates/pricing models and understanding how many transactions your business is recording per month to decide which option is best for you.

Allowing customers to pay with credit cards can increase your sales by up to 23 percent. If you choose to take advantage of this option for your business, our payment processing solutions partner CardConnect can assist in getting you set up with free terminals, low fixed rates and mobile device plug-ins.

 

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.


Steps to starting a business – part II: ancillary considerations

In part I of “Steps to starting a business,” we covered the five essential steps to establishing your business, including your Federal Employer Identification Number, state formation documents, banking options, bookkeeping and legal protection.

While those steps are typically required to get a company off the ground, there are other ancillary considerations every business owner should explore to take a company to the next level and increase its chances for success. The five additional steps GovDocFiling recommends are outlined as follows.

Step 1: Payroll

Your business may be a one-person operation — in which case, cutting paychecks likely won’t be on your to-do list. However, if you have or plan to hire employees at any point, including freelancers or independent contractors, you will need to pay them. Consistent, accurate paychecks are essential to retention of hired help.

Along with paychecks come taxes. Employers are tasked with making sure they properly withhold the appropriate amount of taxes from employee paychecks, including state and federal income, Social Security and Medicare taxes, which are determined by each individual employee’s W-2 and W-4 forms. Failure to do so can result in an IRS audit and serious financial and/or legal consequences.

Benefits are another aspect of payroll that you will run into as you hire employees. Life insurance, 401(k) contributions, as well as health, vision and dental insurance — while not mandatory — are typically offered in some combination to new hires.

Keeping all of this organized is no small feat. Finding a partner or software that can help manage payroll automation and deductions for tax, health benefits and retirement contributions will help keep your business running smoothly. For small businesses, we recommend evaluating Run by ADP. If your operation becomes large enough, hiring human resources and/or accounting personnel may be warranted.

Step 2: Financing and loans

Not many business owners can fund their operation on their own without outside help. If your business activities require additional financial resources, you will want to look into a financing partner and/or a small business loan. Many financial institutions, such as banks and credit unions, provide capital (usually via a line of credit) to businesses to help them pay for daily operations, manage fluctuations in revenue and expenses and ultimately achieve their goals.

Small business loans allow business owners to borrow a set amount of money and allocate it across business expenses as they see fit. However, the terms of a small business loan can vary greatly depending on the lender, interest rates, your credit score and more.

If you are unsure of the financing option that will best compliment your business strategy, we recommend WCAP Financial Services for additional guidance.

Step 3: Insurance

If you’re in business, you’re exposed. While the number of risks you’re exposed to is almost unlimited, you might only need basic coverage to start out. This coverage might include general liability insurance – which guards against things like accidents, injuries, property damage and lawsuits – or commercial auto insurance if you use vehicles for work.

As your business grows, so do your liabilities. Other coverage you may want to consider include:

  • Property insurance – protects your commercial buildings and most of your personal property
  • Business income interruption insurance – you can still pay your bills in the event of a business interruption
  • Professional liability – protects you against claims that a professional service you provided caused your client to suffer financial harm due to errors or omissions

Determining the level of protection you need will vary business to business, and a legal advisor can guide you toward the right insurance policies. The first step is to think through the types of “worst case” situations and types of liabilities that are applicable to your business.

Step 4: Website

We live in a digital age. If your business doesn’t have at least a basic website, you’ve already lost credibility with most potential customers/clients. You don’t need to know how to code or be a graphic designer to build a well-functioning, aesthetically pleasing website. There are many free or inexpensive tools available, such as Wix.com or Weebly.com to help you do so. These tools can also guide you through additional considerations for your website, such as mobile responsiveness and search engine optimization.

If you are planning on selling a product, having an online store is essential. eCommerce companies will need to build out a website that allows for products to be easily uploaded through some type of shopping cart software. Because this type of website often requires back-end development, security, responsiveness and a certain level of customization, hiring or at least consulting a digital partner is necessary.

Step 5: Promotion and marketing

Once you have an established business and website, you will want to promote your offerings and ensure customers can find you. The way in which you should advertise your business will depend on your target audience.

Some options include:

  • Email marketing: Consistent outreach to your clients/customers via frequent emails that provide value-added content or showcase new products/sales
  • Search engine marketing: Ads that link to your website and appear for certain search terms. Also known as pay-per-click advertising, you only pay for every ad click
  • Search engine optimization (SEO): strategies to ensure your website ranks high for particular search terms related to your business

Keep in mind that there is no one-size-fits-all approach to reaching potential customers. The way in which you reach them today might not make sense tomorrow. Because digital marketing and search engine algorithms are constantly evolving, we recommend consulting an outside agency or expert to manage the strategy for your business. You can email info@govdocfiling.com if you are interested in being connected with an SEM, SEO or digital marketing agency that is a good fit for your business.

The above steps serve as ancillary considerations for new business owners but should not be prioritized over the essentials. If you need guidance on any of the services mentioned in part I or part II of this blog post, reach out to here. GovDocFiling will take care of the important stuff so you can focus on the big picture.

 

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.


Is an LLC right for me?

Find Out Why an LLC is The Most Popular Business Entity

One of the most important decisions you will make as a new business owner is the legal structure of your business. This structure – also known as an entity – determines the income tax return form you will file each year, ultimately affecting the earnings, overall profitability and success of your business. From Partnerships to Corporations to Limited Liability Companies, each entity has its own advantages and limitations.

A Limited Liability Company, usually referred to as an “LLC,” is one of the most common entity types, due to its flexible business structure and ability to protect personal assets of the business owner. It may seem like common sense to choose a structure that promises “limited liability.” After all, who wants more liability? The decision has far-reaching effects, so you want to make sure you research and consider the benefits and limitations for your individual business needs.   

The ABCs of LLCs

There are several cornerstones of LLCs that are important to understand to determine whether or not the structure makes sense for your business.

Benefits

  • Protected assets: LLCs provide limited liability protection to their owners, who are generally not personally in charge of company debts and obligations. This means lenders cannot pursue the personal assets of the owners – such as homes, savings accounts or property – in the case of outstanding business debts or lawsuit settlements. In contrast, general Partnerships and Sole Proprietorships allow personal assets to be exposed, as the company and owners are legally considered the same. Simply put, an LLC separates and provides a layer of protection between yourself/your personal assets and your business, its assets and liability.
  • Pass-through tax: One of the biggest advantages of the LLC structure is its flexibility in filing taxes. LLCs, by default, are a “pass-through” taxation entity, which means any taxes on the income from your business are reported and  calculated on your personal income tax return (and those of any other owners/members). LLC owners are only taxed once, at the personal level, unless members elect to be taxed as a Corporation. If it is a multi-member LLC, then the default taxation is of a Partnership, which also passes through the taxable income from the LLC to the personal tax returns of the multiple owners.
  • Flexibility to choose how the LLC is taxed: Limited Liability Companies can elect to be taxed as an S-Corporation or a C-Corporation, instead of a pass-through LLC. This means that you, as an owner, are taxed on your personal return for the income of the business, and the business is taxed.
  • Fewer restrictions and requirements: There are very few limitations on who can become an LLC owner or how many owners an LLC may have, unlike S-corporations. LLCs also face fewer yearly and ongoing state-enforced demands. An added bonus? Less paperwork.
  • Flexible management arrangement: LLCs are free to establish any organizational structure agreed upon by the business owners. They can be managed by the owner(s) or by supervisors, unlike Corporations, which have a board of directors who oversee the important business decisions of the firm and officers who manage day-to-day issues.

Limitations

  • Self-employment taxes: One benefit of an LLC is the ability to be taxed on a personal level, rather than as a corporation. However, because LLC members are considered self-employed business owners rather than employees, they are not subject to tax withholding. Instead, each LLC member is responsible for estimating and setting aside enough money to pay taxes on their share of profits. Without proper planning, this can result in forking over a big unexpected check to the IRS during tax time.
  • Limited life: Most of the time, LLCs do not live on beyond their founding or “managing” members; the LLC must dissolve upon their death, bankruptcy, retirement, resignation, expulsion or dissolution. This lack of perpetuity can be a factor that causes new business owners to form instead as a Corporation, for example.
  • Lack of structure: Some business owners thrive when given freedom to manage a company as they see fit. Others may find this flexibility overwhelming and prefer more direction, structure and clarity of roles – from a board of directors of a Corporation, for example.
  • Annual franchise tax: Maintaining an LLC costs can average up to $800 per year depending on which state you filed your articles of organization with. While this can be seen as a drawback, the benefits of the LLC structure typically outweigh this cost as long as the company becomes profitable.

Many businesses benefit from forming an LLC, but it’s not right for every company. Because of the simplicity and flexibility, it is a very common option for many companies. Once you decide to start an LLC, the first thing you will need to do is get an EIN/Tax ID Number, or Federal Tax ID Number, for your LLC. You can file for your EIN/Tax ID using this link: https://app.govdocfiling.com/LLC.

If you’re still unsure of which entity type to choose, you can take a short survey to help decide here: https://www.govdocfiling.com/survey/. If you would like the advice of a small business lawyer or accountant on your specific needs, you can fill out this form, and GovDocFiling will coordinate a consultation.

Our philosophy is to help you get things done correctly the first time to avoid expensive issues down the road. No matter what kind of company you’re starting, GovDocFiling will walk you through the steps for selecting an entity, obtaining your Tax ID and getting your business off the ground.

 

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.