Category: Legal

Categories
Legal

Business Umbrella Insurance

A commercial umbrella insurance policy adds more coverage to any existing liability policies you have. It covers liability claims that go above your coverage limits. It’s additional liability protection.

What is Umbrella Insurance for Business?

This umbrella coverage covers small businesses the same way business liability insurance does. It covers costs like legal expenses, medical bills on injury claims…etc.

Commercial umbrella insurance isn’t a stand-alone product. It works with other liability coverage policies. Like general liability insurance.

Read More: Types of Business Insurance

Does My Business Need an Umbrella Policy?

Business needs an umbrella policy for additional coverage.

  • If the public goes on your commercial property.
  • If anyone you employ works on other people’s property.
  • If a government contract requires umbrella coverage, most do.

If your business might get sued. In other words, most can use this additional layer to cover the financial risk from lawsuits.

Why You Should Have Umbrella Insurance

Commercial umbrella insurance covers what other policies miss.

Here are five other reasons why you need this extra liability coverage.

  • Got lots of foot traffic? This covers liability risk.
  • Got lots of vehicles? An umbrella policy offers auto insurance.
  • Use dangerous equipment? Umbrella policies cover employees’ severe injury claims, it is great for construction businesses.
  • Need to land a big contract? Extra coverage through an umbrella insurance policy helps satisfy bigger clients.
  • Is a lawsuit escalating? An umbrella insurance policy steps in when you exceed your coverage limits.

What is Covered by Business Umbrella Insurance?

A commercial umbrella policy needs to be comprehensive. Look through these different types of business insurance for reference.

Read More: Business Insurance Benefits

A business should check to be sure it has the following:

Liability Coverage

Get commercial umbrella insurance cover for legal issues that crop up. These insurance policies handle liability claims for property damages or injuries. Umbrella policies expand the liability limits offered with a general liability policy.

Global Coverage

This is the kind of liability coverage a small business needs when it works online. When a business interacts with global customers, an existing underlying policy might not be enough.

A commercial umbrella policy can fill the gaps. If you can’t get this kind of liability protection where you are, other insurance companies might have it. Ask around to avoid worst-case scenarios.

Property Damage

One of the other options is to add financial protection. A policy that covers business equipment or other items your business owns. An umbrella insurance policy here is divided into loss of use or bodily injury categories.

Medical Expenses

An expansion of your other liability insurance policy covers medical expenses if your small business is up against a bodily injury claim.

Those are a few of the boxes to check when you’re looking at commercial umbrella insurance options. Ask the insurance company you’re thinking of what you’ll need specifically.

What is Business Umbrella Insurance, and Do You Need it? [Smallbiztrends]

Categories
Legal

Legal Structure For Business

How to Choose the Best Legal Structure for Your Business

Choosing the right legal structure is a necessary part of running a business. Whether you’re just starting out, or your business is growing, it’s important to understand the options.

  • Partnerships carry a dual status as a sole proprietorship or limited liability partnership, depending on the entity’s funding and liability structure.
  • Under an LLC, members are protected from personal liability for the debts of the business if it cannot be proven that they acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business.
  • Corporations can sell shares of stock to secure additional funding for growth, while sole proprietors can only obtain funds through their personal accounts, using their personal credit or taking on partners.
  • This article is for business owners looking to learn more about the different small business legal structures.

Choosing the right legal structure for your business starts with analyzing your company’s goals and considering local, state and federal laws. By defining your goals, you can pick the legal structure that best fits your company’s culture. As your business grows, you can change your legal structure to meet your business’s new needs.

We’ve compiled the most common types of business entities and their notable features to help you decide on the best legal structure for your business.

Types of business structures

The most common types of business entities include sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here’s more about each type of legal structure.

1. Sole proprietorship

This is the simplest form of business entity. With a sole proprietorship, one person is responsible for all a company’s profits and debts.

“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, CEO of MyCorporation. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”

Proprietorship costs vary, depending on which market your business is part of. Generally, your early expenses will consist of state and federal fees, taxes, equipment needs, office space, banking fees, and any professional services your business decides to contract. Some examples of these businesses are freelance writers, tutors, bookkeepers, cleaning service providers and babysitters.

Here are some of the advantages of this business structure:

  • Easy setup. A sole proprietorship is the simplest legal structure to set up. If your business is owned by you and only you, this might be the best structure for your business. There is very little paperwork since you have no partners or executive boards to answer to.
  • Low cost. Costs vary depending on which state you live in, but, generally, the only fees associated with a proprietorship are license fees and business taxes.
  • Tax deduction. Since you and your business are a single entity, you may be eligible for certain business tax deductions, such as a health insurance deduction.
  • Easy exit. Forming the proprietorship is easy and so is exiting one. As a single owner, you can dissolve your business at any time with no formal paperwork required. For example, if you start a daycare center and wish to fold the business, you can simply refrain from operating the daycare and advertising your services.

Examples of sole proprietorships:

The sole proprietorship is one of the most common small business legal structures. Many popular companies started as sole proprietorships and eventually grew into multi-million dollar businesses. A few examples include:

  • eBay
  • JC Penny
  • Walmart
  • Marriott Hotels

2. Partnership

This entity is owned by two or more individuals. There are two types: a general partnership, where all is shared equally; and a limited partnership, where only one partner has control of its operation while the other person (or persons) contributes to and receives part of the profits. Partnerships carry a dual status as a sole proprietorship or limited liability partnership (LLP), depending on the entity’s funding and liability structure.

“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner, like running a restaurant or agency together,” said Sweeney. “A partnership allows the partners to share profits and losses, and make decisions together within the business structure. Remember that you will be held liable for the decisions made, as well as those actions made by your business partner.”

The cost of a general partnership varies, but it is more expensive than a sole proprietorship, because you want an attorney to review your partnership agreement. The experience and location of the attorney can affect the price range. A general partnership must be a win-win for both sides for it to be successful.

An example of this type of business is Google. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and turned it into the leading search engine globally. The co-founders first met at Stanford University while pursuing their doctorates and later left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. Having a combined ownership of 16% of Google provides them with a total net worth of nearly $46 billion.

Here are some of the advantages of a business partnership:

  • Easy to form. Like a sole proprietorship, there is little paperwork to file. If your state requires you to operate under a fictitious name (“doing business as” or DBA), you’ll need to file a Certificate of Conducting Business as Partners and draft an Articles of Partnership agreement, both of which have additional fees. A business license is usually needed as well.
  • Growth potential. You’re more likely to obtain a business loan when there’s more than one owner. Bankers can consider two credit lines rather than one, which can be useful if you have a less-than-stellar credit score.
  • Special taxation. General partnerships must file federal tax Form 1065 and state returns, but, usually, they do not pay income tax. Both partners report their shared income or loss on their individual income tax returns. For example, if you opened a bakery with a friend and structured the business as a general partnership, you and your friend are co-owners. Each owner brings a certain level of experience and working capital to the business, which can affect each partner’s share of the business and their contribution. Let’s say you brought the most seed capital for the business; it could be decided that you retain a higher share percentage, making you the majority owner.

Examples of partnerships

Next to a sole proprietorship, partnerships are one of the most common types of business structures. Examples of successful partnerships include:

  • Warner Brothers
  • Hewlett Packard
  • Microsoft
  • Apple
  • Ben & Jerry’s
  • Twitter

3. Limited liability company

A limited liability company (LLC) is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership. Under an LLC, members are shielded from personal liability for the debts of the business if it cannot be proven that they acted in an illegal, unethical or irresponsible manner in carrying out the activities of the business.

“Limited liability companies were created to provide business owners with the liability protection that corporations enjoy while allowing earnings and losses to pass through to the owners as income on their personal tax returns,” said Brian Cairns, CEO of ProStrategix Consulting. “LLCs can have one or more members, and profits and losses do not have to be divided equally among members.”

The cost of forming an LLC comprises the state filing fee and can range from $40 to $500, depending on the state you filed in. For example, if you file an LLC in the state of New York, there’s a $200 filing fee and $9 biennial fee. Further, you must file a biennial statement with the NY Department of State. [Check out our step-by-step guide on how to start an LLC].

Although small businesses can be LLCs, some large businesses choose this legal structure. One example of an LLC is Anheuser-Busch Companies, one of the leaders in the U.S. beer industry. Headquartered in St. Louis, Missouri, Anheuser-Busch is a wholly owned subsidiary of Anheuser-Busch InBev, a multinational brewing company based in Leuven, Belgium.

Examples of LLCs

The LLC is typical among accounting, tax and law firms, but other types of companies also file as LLCs. Well-known examples include:

  • Pepsi-Cola
  • Sony
  • Nike
  • Hertz Rent-a-Car
  • eBay
  • IBM

4. Corporation

The law regards a corporation as an entity separate from its owners. It has its own legal rights, independent of its owners – it can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. Corporation filing fees vary by state and fee category. For example, in New York, the S corporation and C corporation fees are $130, while the nonprofit fee is $75.

There are several types of corporations, including C corporations, S corporations, B corporations, closed corporations and nonprofit corporations.

  • C corporations, owned by shareholders, are taxed as separate entities. Morgan Chase & Co. is a multinational investment bank and financial services holding company that’s listed as a C corporation. Since C corporations allow an unlimited number of investors, many larger companies, including Apple Inc., Bank of America, and Amazon, file for this tax status.
  • S corporations were designed for small businesses and avoid double taxation, much like partnerships or LLCs. Owners also have limited liability protection. Widgets Inc. is an example of an S corporation that operates very simply: Employee salaries are subject to FICA tax, while the distribution of additional profits from the S corporation does not incur further FICA tax liability.
  • B corporations, otherwise known as benefit corporations, are for-profit entities structured to make a positive impact on society. The Body Shop has proven its long-term commitment to supporting environmental and social movements, resulting in an awarded B corporation status. The Body Shop uses its presence to advocate for permanent change on issues like human trafficking, domestic violence, climate change, deforestation and animal testing in the cosmetic industry.
  • Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection. Closed corporations, sometimes referred to as privately held companies, have more flexibility compared to publicly traded companies. Hobby Lobby is a closed corporation; it’s a privately held, family-owned business. Stocks associated with Hobby Lobby are not publicly traded; rather, the stocks have been allocated to family members.
  • Open corporations are available for trade on a public market. Many well-known companies, including Microsoft and Ford Motors, are open corporations. Each corporation has taken ownership of the company and allows anyone to invest.
  • Nonprofit corporations exist to help others in some way and are rewarded by tax exemption. Some examples of nonprofits are the Salvation Army, American Heart Association and American Red Cross. These types of business structures have one sole purpose: focusing on something other than turning a profit.

Advantages of this business structure include: :

  • Limited liability. Stockholders are not personally liable for claims against your corporation; they are only liable for their personal investments.
  • Continuity. Corporations are not affected by death or the transferring of shares by its owners. Your business continues to operate indefinitely, which is preferred by investors, creditors and consumers.
  • Capital. It’s much easier to raise large amounts of capital from multiple investors when your business is incorporated.

This type of business is ideal for businesses that are further along in their growth, rather than a startup based in a living room. For example, if you’ve started a shoe company and have already named your business, appointed directors, and raised capital through shareholders, the next step is to become incorporated. You’re essentially conducting business at a riskier, yet more lucrative rate. Additionally, your business could file as an S corporation for the tax benefits associated with it.

Examples of corporations

Once your business grows to a certain level, it’s likely in your best interest to incorporate it. There are many popular examples of corporations, including:

  • General Motors
  • Amazon
  • Exxon Mobil
  • Domino’s Pizza
  • P. Morgan Chase

5. Cooperative

A cooperative (co-op) is owned by the same people it serves. Its offerings benefit the company’s members, also called user-owners, who vote on the organization’s mission and direction and share profits. Advantages that cooperatives offer include:

  • Lower taxes. Like an LLC, a cooperative doesn’t tax its members on their income.
  • Increased funding. Cooperatives may be eligible for federal grants that help them get started.
  • Discounts and better service. Cooperatives can leverage their business size, thus obtaining discounts on products and services for their members.

Forming a cooperative is complex and requires you to choose a business name that indicates whether the co-op is a corporation, such as incorporated (Inc.) or limited. The filing fee associated with a co-op agreement varies by state. In New York, for example, the filing fee for an incorporated business $125.

An example of a co-op is CHS Inc., a Fortune 100 business owned by U.S. agricultural cooperatives. As the nation’s leading agribusiness cooperative, CHS recently reported a net income of $829.9 million for the fiscal year ending Aug. 31, 2019.

Examples of cooperatives

Unlike the other types of businesses, co-ops are owned by the people they serve. Notable examples of co-ops include:

  • Land O’Lakes
  • Navy Federal Credit Union
  • Welch’s
  • REI
  • Ace Hardware

Factors to consider before choosing a business structure

For new businesses that could fall into two or more of these categories, it’s not always easy to decide which structure to choose. You need to consider your startup’s financial needs, risk and ability to grow. It can be difficult to switch your legal structure after you’ve registered your business, so give it careful analysis in the early stages of forming your business.

Here are some important factors to consider as you choose the legal structure for your business. You should also plan to consult with your CPA for his or her advice.

Flexibility

Where is your company headed, and which type of legal structure allows for the growth you envision? Turn to your business plan to review your goals, and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change, not hold it back from its potential.

Complexity

When it comes to startup and operational complexity, nothing is more simple than a sole proprietorship. You simply register your name, start doing business, report the profits, and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits. Corporations and LLCs have various reporting requirements with state governments and the federal government.

Liability

A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means that creditors and customers can sue the corporation, but they cannot gain access to any personal assets of the officers or shareholders. An LLC offers the same protection, but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement.

Taxes

An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year.

“As a small business owner, you want to avoid double taxation in the early stages,” said Jennifer Friedman, chief marketing expert at Expertly.com. “The LLC structure prevents that and makes sure you’re not taxed as a company but as an individual.”

Individuals in a partnership also claim their share of the profits as personal income. Your accountant may suggest quarterly or biannual advance payments to minimize the end effect on your return.

A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as for Social Security and Medicare, on your personal return. [Check out our reviews of the best payroll services.]

Control

If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice for you. You can negotiate such control in a partnership agreement as well.

A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so, too, does the need to operate it as a board-directed entity. Even for a small corporation, the rules intended for larger organizations – such as keeping notes of every major decision that affects the company – still apply.

Capital investment

If you need to obtain outside funding, such as from an investor, venture capitalist, or bank, you may be better off establishing a corporation. Corporations have an easier time obtaining outside funding than sole proprietorships.

Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can only obtain funds through their personal accounts, using their personal credit or taking on partners. An LLC can face similar struggles, although, as its own entity, it is not always necessary for the owner to use their personal credit or assets.

Licenses, permits and regulations

In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

“States have different requirements for different business structures,” Friedman said. “Depending on where you set up, there could be different requirements at the municipal level as well. As you choose your structure, understand the state and industry you’re in. It’s not a ‘one size fits all,’ and businesses may not be aware of what’s applicable to them.”

The structures discussed here only apply to for-profit businesses. If you’ve done your research and you’re still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law.

How to Choose the Best Legal Structure for Your Business [Business News Daily]

Categories
Legal

Exempt vs. Nonexempt: What Is the Difference?

Learn the difference between hiring exempt and nonexempt employees.

  • Business owners need to properly classify their employees as exempt or nonexempt to avoid legal ramifications supported by the Fair Labor Standards Act (FLSA).
  • Exempt employees must earn a minimum of $455 per week; be paid the same amount of money regardless of hours worked; and perform executive, professional, or administrative duties.
  • Nonexempt employees have no limitations or requirements for the number of hours they can work each week, but they must receive overtime pay if they work more than 40 hours in one week.
  • This article is for employers who are trying to make the determination between exempt and nonexempt employees.

It is an employer’s responsibility to accurately determine whether an employee should be classified as exempt or nonexempt. An employee’s classification as exempt or nonexempt is not a matter of preference or choice – the Fair Labor Standards Act (FLSA) has stipulations that determine and regulate each classification.

To avoid misconduct and legal ramifications, it is important to know which category each new hire falls under. Joshua Gerlick, a doctoral student of nonprofit management and a Fowler Fellow at Case Western Reserve University, said that business owners must carefully design job titles and descriptions that fall clearly into either the exempt or nonexempt category.

“Misclassification of employees is costly, and penalties can be retroactive – potentially back to the beginning of an employee’s date of hire,” Gerlick told Business News Daily.

Although some regulations vary by state, there are some basic rules you must follow when determining how to classify and compensate your employees.

What are exempt employees?

Exempt employees are those who are paid a regular salary, a predetermined amount of money distributed in regular intervals throughout the year. These employees do not qualify for minimum wage, nor do they receive overtime pay. “Exempt” means the employee is exempt from overtime pay. The FLSA regulates which employees are exempt and which are nonexempt.

Key takeaway: Exempt employees do not qualify for minimum wage, and they do not receive overtime pay.

What are nonexempt employees?

Nonexempt employees are those who are eligible for minimum wage and overtime pay calculated at 1.5 times their hourly rate of pay. They are often paid hourly for the precise amount of time worked in a pay period. Those who are nonexempt, and when they are eligible for overtime pay, is subject to federal and state standards.

Key takeaway: Nonexempt employees are eligible to receive overtime pay and minimum wage.

Overtime pay: Exempt vs. nonexempt employees

One of the main differences between exempt and nonexempt positions is compensation. Brian Cairns, CEO of ProStrategix Consulting, said that employees with exempt status must earn at least $455 per week but cannot receive payment for overtime. Nonexempt employees must earn at least minimum wage and are eligible for overtime pay.

“Overtime is paid at time and a half once a nonexempt employee works more than 40 hours a week or on specific holidays,” Cairns said. “This was the basis for the old classification of white-collar versus blue-collar workers.”

Overtime pay rules are set in the FLSA. The baseline is that overtime is paid at 1.5 times the rate of pay for every hour worked above 40 hours in a 168-hour consecutive workweek.

As of 2020, employers can pay bonuses to nonexempt employees on top of their regular pay. The full rules for overtime can be found on the U.S. Department of Labor’s website.

Key takeaway: Exempt employees are not eligible for overtime, while nonexempt employees are eligible for overtime pay. Specific guidance comes from the federal and state level, depending on where your business is located.

How to classify exempt vs. nonexempt employees

According to the FLSA, there are three basic tests you can perform to determine whether an employee should be classified as exempt or nonexempt:

  1. Salary level test: An employee earning more than $35,568 per year ($684 per week) qualifies (but is not guaranteed) as exempt.
  2. Salary basis test: An employee who receives a guaranteed minimum compensation, regardless of the time actually worked, qualifies (but is not guaranteed) as exempt.
  3. Duties test: An employee who meets the exemption requirements of tests one and two must also perform an exempt job duty, which can be one or more of the following:
    • Exempt executive duties: The employee supervises two or more other employees as a regular part of their job.
    • Exempt professional duties: The employee performs intellectual activities that require specialized education and the use of discretion and judgment.
    • Exempt administrative duties: The employee performs support operations for significant matters that require the use of discretion and judgment.

“To be considered exempt, an employee must meet the requirements of all three tests,” said Gerlick. “However, the application of these tests is often complicated, and a business owner should consult with their legal advisor to determine specific applicability to a specific job function.”

There may be some exemptions to these rules, including by profession, industry, or pay structure. Visit the Department of Labor website, or consult a payroll professional for more information.

The U.S. Department of Labor (DOL) updated the federal overtime provisions of the FLSA in 2020. The new standards are as follows:

  • Exemptions to white-collar salaries increased from $455 per week to $684 per week.
  • Up to 10% of the standard salary level can comprise bonuses, incentive pay, and/or commissions.
  • The new compensation requirement for what’s classified as highly compensated employees increased to $107,432 from $100,000.

Key takeaway: According to the FLSA, you can determine if an employee is exempt or nonexempt by salary level, salary basis, and job duties.

Pros and cons of exempt employees

Although the employee classification of “exempt” may seem ideal for some employers, that is not the case for everyone. There are many benefits and drawbacks to hiring (and working as) an exempt employee.

For the employer

Since exempt employees cannot earn overtime pay, Gerlick said that the primary benefit of hiring an exempt employee is the ability to demand a certain level of performance or output while maintaining a fixed budget. However, Gerlick warned that exempt employees typically cost more than their nonexempt counterparts, largely due to the expectation that they will use discretion and judgment in executing their duties.

For the employee

Cairns said the primary benefits of exempt employees include paycheck stability, eligibility for benefits, and standard business hours. However, employees with exempt status generally have less-flexible work schedules than nonexempt employees, and they can’t be paid overtime, even if they work more than 40 hours a week.

Key takeaway: Exempt employees are not owed overtime pay, which helps employers stay within their budget. Exempt employees are also eligible for benefits. However, they have less flexibility in their schedules, and they may work more than 40 hours a week without additional compensation.

Pros and cons of nonexempt employees

Hiring nonexempt employees comes with its own set of benefits and drawbacks for employers and employees alike.

For the employer

Hiring a nonexempt employee offers flexibility for employers, since there is no minimum requirement for how many hours they should work each week. You can pay a nonexempt employee an hourly rate (minimum wage or higher) and schedule them based on your company’s needs.

There are a few drawbacks to hiring nonexempt employees, the primary one being overtime pay for employees who work more than 40 hours a week. You will need to accurately monitor and track employee hours to ensure that they are being accurately compensated for their time. [Read related article: What You Need to Know About the Federal Overtime Rules]

For the employee

Although the most obvious benefit for nonexempt employees is the ability to work overtime and receive proper compensation for every hour worked, Cairns said there are drawbacks that nonexempt employees should know about. Since hours can vary week to week, nonexempt employees may not have a stable or consistent paycheck, their work hours may not adhere to standard business hours, and, in some states, they may not be eligible for paid vacation or sick time.

Key takeaway: Nonexempt employees offer employers flexibility for hours worked, but those who work more than 40 hours a week are owed overtime. Employees receive accurate pay for actual hours worked, but their paychecks may fluctuate as hours worked can vary from week to week.

When to hire exempt or nonexempt employees

When creating job titles and descriptions for your employees, consider which category (exempt or nonexempt) will benefit your company the most. Review what duties you will need to be completed and what type of payment you would like to pay (salary or hourly).

Cairns said that some types of jobs are legally required to be exempt and can only be hired as such. However, for positions that can be modified to fit one category or the other, Gerlick said business owners must decide which is more important: flexibility or expertise.

“Hiring an hourly-wage employee whose duties are nonexempt gives owners the option to adjust working hours according to demand – perhaps scheduling 15 hours for one week and 35 hours the week thereafter,” said Gerlick. “Despite the added cost, hiring a salaried employee whose duties are exempt fixes the labor cost regardless of the required time for the employee to accomplish a given objective.”

As a rule of thumb, nonexempt employees are better suited to hourly, temporary, or seasonal work, whereas exempt employees are more suited to long-term positions with executive, administrative, or professional duties. It is important to differentiate these positions based on the actual duties and then hold your employees accountable to the set guidelines.

Gerlick said a common mistake for business owners is designing a job that qualifies as exempt, but then not allowing that employee to exercise the judgment and discretion commensurate with the job description. This mistake can be very costly to your business: If that employee decides to take legal action, they can use the FLSA to support their claims against you.

“If employers are unfamiliar with the particulars of the FLSA, they should retain competent human resources counsel to review job descriptions and occasionally audit job duties to ensure the applicability of existing classifications,” said Gerlick. “Proactivity is crucial. Issues don’t typically arise until an unhappy employee files a lawsuit.”

Key takeaway: When determining whether to hire an exempt or nonexempt employee, consider the job description, length of the job (temporary, short-term, or permanent), whether the position is part time or full time, and the type of candidate you want to hire.

Exempt vs. Nonexempt: What Is the Difference? [Businessnewsdaily]

Categories
Legal

Pros & Cons of an LLC

Forming a limited liability company can be the perfect strategy for a business. There’s areason that it’s been the most common business entity in the US for the past 20 years.

One of the main reasons that a business or a group of people, form LLCs is to protect personal assets. Just as it sounds, there’s limited liability for owners of the business. It’s hands-off for the property they personally own.

As with every decision made for businesses, there are many more things to consider before taking this step. Of course, paperwork is involved. There may be tax implications that are advantageous, or not. There are different types of membership structures.

You can’t think about those considerations until you’ve gathered information. That way you can make comparisons and determine what’s best for you.

You can weigh the advantages and disadvantages, and see if the pros outweigh the cons. Or vice versa. For each individual business, there’s a business structure that is right for it.

What is a Limited Liability Company?

LLC’s limit the personal liability of business owners or partners. It protects their assets. It is a business structure that can have one owner, such as a sole proprietor, or any number of members.

LLC’s are taxed in a special way. When the owners file tax returns, business income is passed through to become part of the owner’s income. You can make money or lose money. If you need expert advice, you can seek help creating an LLC by using a website like CorpNet.

The Pros of an LLC

So, what can you do with an LLC? We reached out to Nellie Akalp for expert input about LLCs as a business strategy. Akalp is the CEO and Founder of CorpNet.com.

Akalp said that there are many advantages to setting up an LLC as opposed to operating as a sole proprietorship. In many cases, an LLC is the best choice.

“The main pros, in my opinion, are protecting personal assets, tax flexibility and gaining credibility,” Akalp said. “Since an LLC is its own legal entity if someone sues the company or it gets into financial debt, the owner’s assets are generally protected.”

“To maintain that asset protection, it’s essential that the owners keep personal and business activity and finances separate, they avoid engaging in fraudulent activity, they pay their taxes and filing fees onetime and they stay up to date on all compliance formalities needed to keep their LLC in good standing,” she added.

Akalp also went into more depth about tax flexibility and business credibility.

Tax Flexibility

“By default, an LLC is considered the same tax-paying entity as its owner,” Akalp explained. “Income and losses pass through to the owner’s personal tax return and profits are subject to self-employment tax.”

“Online Sole proprietorships, LLCs, however, may elect to be treated as an S Corporation which can lead to tax savings in some situations.”

Business Credibility

“Having an LLC behind a company name may make it look more professional to prospective clients, vendors, partners and investors,” Akalp said. “Many people perceive ‘LLC’ behind a company name as having a business that is more capable or professional.”

Here is more info about the benefits of having a limited liability company:

Simplicity

Filing LLC documents or paperwork is simple with fill-in-the-blanks forms at Secretary of State websites. You need a separate bank account and credit cards.

Limited Liability Protection

Limited Liability means an owner is protected from losing personal assets.

Flexible Membership Numbers

You can form a single-member LLC or have two or more members. There is no limit to members.

Fewer State-Imposed Compliance Requirements

State requirements are clearly defined. Basically, you need Articles of Organization, an Operating Agreement, and a Registered Agent.

Tax Advantages

The LLC has pass-through taxation at the business entity level. That means that you bypass corporate income tax. The profits or losses are reported within the business owner’s personal income tax filing.

Credibility of Having a Limited Liability Company

Having the LLC as part of the business name makes a statement. It adds credibility to the business name as a business that has a formal structure.

Deductions on Healthcare

The LLC can deduct the cost of medical insurance for employees who are not members of the LLC. If the LLC is set up to run and be taxed as an S Corp, the owners can take personal income tax deductions on premiums that are paid. If you’re a single-member LLC you can deduct the cost of your individual health insurance.

Flexibility of Management Structure

The LLC can be manager-managed or member-managed. The number of LLC members is unlimited.

Revenues for Members

Revenues for members can be placed into a living trust. The living trust can be a “member” of the LLC. Remember that a trust is a legal document that establishes ownership over assets, using a grantor and trustee. If the grantor dies, the monies in the trust can be transferred to the trustees, avoiding the probate process.

Ease of Cash Distribution

Members or owners can take money from the company profit account. They can do this in lieu of having a salary.

Deduction of Losses

If the LLC loses money, the loss can be deducted as a business loss on the personal tax return. It can help you save money on taxes.

The Cons of an LLC

Is an LLC best for you? There are also downsides to creating an LLC. As a business owner, it’s time to start a list, pros, and cons LLC.

“Generally speaking, no there are no limits of protection for an LLC,” Akalp said. “However, for maximum protection one may want to consider a corporation.”

“The LLC is more of a hybrid of a corporation and sole proprietorship,” she explained, “While still offering great asset protection as long as the LLC is in compliance, the corporation does go a step further – So really it would depend on the type of business and liabilities associated with that business.”

Here’s a look at the cons:

Ongoing Costs

Annual reports must be filed, along with renewal filing fees, which can be high. The fees vary from state to state. If there are any changes to infrastructure, the entire LLC business entity may need to be refiled.

Difficulty Transferring Business Ownership

A transfer of owners may require unanimous agreement from all members. The way LLC business ownership is to be transferred is spelled out in the LLC Articles of Organization.

Separate Personal and Business Records

Profit or loss from the LLC must be reported on the owner’s or owner’s personal tax return. All business records related to the LLC must be kept separately. The business should have a separate bank account and credit cards.

Limits to LLC Protection

Although personal assets are protected, owners or members of an LLC can be held accountable for business losses. Business assets can be at risk. This can happen if a member gives a personal guarantee for a business loan or debt. Protection may be limited by the bad acts of an owner or member – such as a member who commits fraud or a crime against the LLC, or if a member personally damages an individual.

Limited Options for Investment

The only way someone can invest in the LLC is by becoming a contributing member or becoming an owner. An LLC can’t issue shares.

Exposure of Profits to Social Security and Medicare Taxes

If the LLC earns a profit, that amount will be added to the owner’s income on tax returns. Social security and Medicare taxes will be assessed.

State-Level Restrictions

An LLC is regulated by state statute.

Pros and Cons of an LLC vs Corporation Business Structure

Here’s a quick look at the advantages and disadvantages between each type, an LLC and a Corporation (Inc.) business. What’s the difference?

First, a definition of a Corporation also called a C Corporation. A C Corporation is a legal structure in which the shareholders, are taxed separately from the C corp.

C Corps are the primary kind of Corporation. There are also S corps. To learn more about an S corporation, see below.

Pros of an LLCs vs Corporation

Profits are reported on the owner’s tax returns and taxed at the owner’s tax rate (self-employment tax rate).

The management structure is set up as desired in Articles of Organization.

LLC is owned by members.

Cons of an LLCs vs Corporation

Corporation profits are subject to corporate tax rates. C corporations are subject to double taxation. The C corp is subject to corporate income taxation. The income of a C corporation is also passed through to shareholders, who are taxed. The C corp pays taxes on earnings before the earnings are distributed to shareholders as dividends. The dividends can be reinvested in the company at a lower corporate tax rate.

Corporation business structure must have a board of directors, officers, and shareholders. The board of directors is voted on by shareholders. There must be annual meetings.

The corporation is owned by shareholders.

A C corporation can also limit the liability of investors. The most an investor can be liable for if a C corporation fails is the amount the person has invested.

 

Pros and Cons of an LLCs vs S Corps

Here’s a quick look at each type, with advantages and disadvantages for small business owners. What’s the difference between an LLC and S-Corp?

First, let’s differentiate between an S Corp and a C corp. An S corp may also be called an S subchapter.

S corporations have to meet specific IRS guidelines that make them different than a C corp:

  1. The S corp must be incorporated domestically.
  2. S corporations can have only one kind of stock.
  3. S corporations can have no more than 100 shareholders.
  4. The shareholders in S corporations can NOT be partnerships, corporations or nonresident aliens.

If each of those guidelines is met, the S corporation may pass income (or losses) directly to shareholders. The S corp can pass income to shareholders without paying federal corporate taxes.

In other words, the S corporation qualification gives the business the benefits of corporation. And one of the S corporation benefits is that is enjoys exemption from federal taxes.

Shareholders of an S corp must report income or loss on individual tax return documents.

Pros of an LLCs vs S Corps

  • LLCs have unlimited owners. Membership interests are important.
  • LLCs have flexibility on how business is set up and run.
  • LLC’s profits are taxed on an individual tax return.

Cons of an LLCs vs S Corps

  • S corporation must be organized with a board of directors.
  • S corporation has strict rules about required meetings and records of meetings.
  • The state filing fees for S corporations are higher than LLC state filing fees.
  • S corporations can have shareholders who are individuals, specific trusts or estates, or tax-exempt organizations.
  • S corporation shareholders are taxed on profits received from the S corporation as part of income taxation. The S corporation earnings are taxed (double taxation).

Pros and Cons of an LLC vs Sole Proprietorship

Are LLCs a good option for a sole proprietor? What are the tax requirements? Tax liability? If you’re self-employed, should you form an LLC?

The short answer? If you need liability protection, consider an LLC. Liability protection is the number one reason for forming an LLC, whether it’s a sole owner or unlimited owners.

Here’s a quick look:

Pros of an LLC vs Sole Proprietorship

With an LLC the sole owner’s personal assets are protected.

A sole owner LLC can be taxed on LLC profit on personal tax return as taxable income, not subject to self-employment taxes.

Easier to separate business and personal accounts, since an LLC requires a dedicated bank account.

A loss from the LLC won’t affect your personal credit score.

Cons of a Single Member LLC vs Sole Proprietorship

As a sole proprietorship, you can be held responsible for liabilities.

A sole proprietorship must file a Schedule C for profit and loss and pay self-employment taxes.

Paperwork must be filed, with fees, as per state regulations. You must file Articles of Organization and Operating Agreement, along with required fees.

Is A Limited Liability Company a Good Idea?

Well, yes and no. It depends on your business goals and your preference for business structure.

You must weigh the pros and cons and decide if an LLC is the best option for you. It’s not the best option for all businesses.

But for many businesses, the choice to form an LLC is as simple as the need to protect the personal assets of an owner or owner. In those cases, forming an LLC for tax purposes is a secondary reason.

Here are the main reasons a business owner would opt to form a Limited Liability Company:

  • Protect Personal Assets
  • For tax purposes.
  • To have flexibility in business structures.

How many owners can an LLC have?

A Limited Liability Company can have an unlimited number of members.

Should my business be a Corporation or an LLC?

You could argue that it’s easier for an individual to become part of a corporation by becoming one of its shareholders. And in that way a corporation can grow financially.

With an LLC, you can’t issue shares for shareholders. You don’t have shareholders. Instead of relying on shareholders, you need to attract outsiders who can invest in your company by becoming co-owner or contributing members.

Which one gives you the biggest break on taxes. I think we all know the answer to that one. Although it may seem that corporations or LLCs are getting breaks on taxes, you’ll pay somewhere. No business entities escape paying taxes.

For a definitive answer on which type of entity is best for you, consult a person who is an expert in taxes for businesses.

An LLC has been the most common type of business entity established in the US for the past 20 years. But the primary reason for choosing this type of entity, instead of forming corporations, is to protect assets.

Should I elect for my LLC to be taxed as an S Corp?

As you consider that option, here’s a term that will help: QBI, or qualified business income. QBI is net income, not gross income. And this is important as you consider choosing taxation as an S corp.

Since an s corp is a pass-through entity, you can deduct up to 20% of QBI. In other words, the s corp taxation guidelines allow the owner to take the 20% QBI deduction on business income.

If the LLC is taxed as an S corp, the business owner pays self-employment tax only on employment income.

Do LLCs pay more taxes than sole proprietorships?

A single-member LLC is taxed as a sole proprietorship.

A multiple-member LLC of two people is taxed as a partnership. The partnership files Form 1065 and each member of the partnership files a Schedule K-1.

LLC members are taxed based on their share of the LLC income. Each member must also pay self-employment tax.

 

Pros and Cons of an LLC [Smallbiztrends]

Categories
Legal

4 Steps That Small Businesses Can Take to Get the Most Out of Contract Renewals

By definition, contracts are finite agreements that usually include some sort of expiration date or end point. This means your company will have to do renewals on an ongoing basis.

If you don’t have a system for handling this function, you run a risk of undermining the long-term profitability and success of your firm.

Contract Renewals: No Trivial Matter

Given so much emphasis on sales, many business owners overlook the importance of retaining existing clients. This can lead to them to trivialize such tasks as contract renewals, which one might argue are the real lifeblood of good service companies.

Don’t make this mistake! Here are some of the reasons why contract renewals matter.

  • Cost-effective. It’s typically much more cost-effective to retain a client than to locate and acquire a new one. If you consistently renew existing contracts, this is one of the leanest ways to grow.
  • Predictable income. As you know, trying to predict your business income in the coming months and years with any sort of accuracy can be a challenging task. The more predictable you can make your contract process as well as the deals themselves, the better. Renewing your contracts comfortably ahead of the deadlines is one of the best ways to stay on track.
  • Better CLV insights. Whether you’re running simple accounting for your own peace of mind, or looking to acquire investors, it’s vital to maintain an accurate understanding of customer lifetime value (CLV). The more contracts you can reliably renew, the higher your CLV will be.

Four Tips for Improving Contract Renewals

If you want to stay lean and maximize internal resources and manpower, streamlining and simplifying your contract renewals is one of the best steps you can take toward achieving those goals. But how do you do it? Here are some four prime suggestions.

 

  • Set Up Proactive Calendars and Reminders

Many of the largest Fortune 2000 companies may have thousands of contracts in effect at any given moment. You probably don’t have that many in the works, but it’s entirely possible that you’re dealing with hundreds, or at least dozens.

No matter how organized and attentive your team is, it’s unlikely that they are able to keep track of absolutely every detail. It’s crucial for you to have calendars that provide proactive alerts that can remind you of upcoming contract renewals, among other things.

You’re much more apt to achieve an excellent contract renewal rate if you start 30 to 60 days in advance.

 

  • Use Contract Lifecycle Management Software

As your business scales upward and your contracts jump in quantity and volume, you should consider integrating contract lifecycle management software into your workflow. 

Contract lifecycle management solutions are designed to streamline every step of the contract process, including initiation, authoring, negotiation, approval, execution, management/compliance, and renewals. Because the program is largely automated, your team will be freed up to focus on the soft skills that make the management of contracts a lot smoother.

 

  • Identify Direct Contacts for Each Client

You can’t just swoop in at the last hour and expect a client to renew a contract … even if the customer is happy with the service you’ve provided over the life of the current agreement.

Relationships are vital for successful renewal rates, so you have to cultivate them from the beginning. Our best piece of advice is to identify a direct contact on the staff of each client organization, and build that relationship over time.

 

If you already enjoy trust and connection with a client before the renewal period approaches, you essentially have an insider/advocate within the customer firm who is apt to vouch for you when the time comes for the entire outfit to evaluate the contract.

 

  • Develop a Centralized Record-Keeping System

Few operational weaknesses have the level of negative impact on contract renewal rates quite like a lack of organization. When you let information or commitment deadlines slip through the cracks, this can kill both your awareness and negotiating power when renewal rolls around.

You need to be fully in-tune with everything that’s happening at every stage of the contract process. Make sure you have some sort of centralized record-keeping system in place.

This may be part of your contract lifecycle management platform. Or, for a small company, it could be something as simple as a collection of spreadsheets. Just make sure you’re doing whatever’s necessary to stay on track.

Take Your Business to the Next Level

In order to build a successful and growing business, you not only have to acquire clients, but you must retain them. Placing too much emphasis on the former without at least as much attention to the latter will run up your costs, waste time, and have a negative impact on the bottom line.

Take the time to develop a strategy that addresses how you pursue contract renewals and optimize it until you get the best possible results.