Starting and running a business in the US: rules you have to play by Craig Forest

1. Starting and running a business in the US:rules you have to play by Craig Forest

2. Business (in the US) • What is a business? • Why form one? • Where should it be based? • How to form it? • Who should be in it? • What type of business?

3. Why?

4. To make an impact on the world To be your own boss Its fun to see your ideas come to fruition Why? For the satisfaction of a hard fought victory To mentor people in your company To have YOUR idea improving SOMEONE’S LIFE To make millions

5. What is a business? • Business or hobby? • Expectation of profit • Run in a systematic, continuous and regular businesslike manner, • Has ordinary commercial principles governing it (such as business and accounting records). Example Baseball card collector? The distinction is important for tax purposes as losses from a business are tax-deductible, while losses generated from a hobby are not.

6. Business or hobby?

7. Hobby: report income, can not deduct losses • Business: report income and deduct losses If you consistently lose money in your business, the IRS could claim it is a hobby and require you to report the expenses as hobby expenses, thereby limiting their deductibility.

8. What do I need to start a business? Minimum!!!!

9. What do I need to start a business? Minimum!!!! An idea Knowledge to produce it Cash Customers Chutzpah

10. What do I need to start a business? Minimum!!!! An idea Knowledge to produce it Cash Customers Chutzpah

11. What do I need to start a business? Minimum!!!! An idea Knowledge to produce it Cash Customers Chutzpah

12. What do I need to start a business? Minimum!!!! An idea Knowledge to produce it Cash Customers Chutzpah

13. What do I need to start a business? Minimum!!!! An idea Knowledge to produce it Cash Customers Chutzpah

14. The credit belongs to the man who is actually in the arena; whose face is marred by dust and sweat and blood; who strives valiantly...who knows the great enthusiasms, the great devotions, and spends himself in a worthy cause; who, at best, knows the triumph of high achievement; and who, at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat. -TR Roosevelt (1910)

15. What else should I have before starting a business? • A prototype of the service, product, … • Knowledge of your competition • Knowledge of the market • Economics of the business • Experience (from friends? family?) • Written business plan • A location (in your home is ok!)

16. In the United States • Luckily we have a government system that makes this easy, cheap • Free enterprise • If you can survive, you can thrive Compare to Europe, Africa, anywhere!

17. Failure 66% of new employer establishments survive at lease two years 44% survive at least four years 1. You start your business for the wrong reasons 2. Poor Management 3. Insufficient Capital 4. Location, Location, Location 5. Lack of Planning 6. Overexpansion Brian Head, Economist with the SBA Office of Advocacy

18. Types of businesses • Sole Proprietorships or partnerships • C-Corporations • S Corporations • Limited Liability Company (LLC)  (or LLP typical in accounting, law)

19. Sole proprietorship • A sole proprietorship is you doing business as yourself, even if you use a fictions name. It is simple, but affords no asset protection. Anything you do in business as a sole proprietorship -- or an employee of yours does -- is your personal liability and this exposes your assets to liability.

20. Sole proprietorships • Pass through tax structure • No liability protection • You are exposed and personally liable for business debts that cannot be met by business funds • Ceases to exist if owner dies or stops doing business • Can file DBA • Can obtain EIN • Exists when you say it exists • Can hire employees • Simplest, quickest way to get going

21. LLC • Limited liability – separate legal entity from its shareholders • For debts • For injury • Continuity of existence • Can be sold, change mgt etc • Transferability of shares • Shareholders may sell or otherwise dispose of their shares at any time (subject to any restriction imposed in the company's constitution).  This makes a company much easier to sell or pass on to others (such as your children) than other business structures. • Marketplace credibility • As compared to sole proprietorships • Control by shareholders • Profit may be distributed as dividends • Cheap to operate relative to corporations • Taxes • Pass through to shareholders http://www.companies.govt.nz/cms/how-do-i/learn-what-a-company-is/why-form-a-company

22. LLC • LLCs offer flexibility in ownership and ease of operation. • No restrictions on the ownership of an LLC. • Not subject to the formalities by which S corps must abide. • An LLC can be member-managed, meaning that the owners run the company; or it can be manager-managed, with responsibility delegated to managers who may or may not be owners in the LLC. • Taxes • A single-member LLC files the same 1040 tax return and Schedule C as a sole proprietor; partners in an LLC file the same 1065 partnership tax return as do owners of traditional partnerships.

23. Corporations • The directors manage the company. • No flexibility in how profits are split up amongst its owners. The profits must be distributed according to the ratio of stock ownership, even if the owners may otherwise feel it is more equitable to distribute the profits differently.

24. S-corp • Taxes • Pass through the income of these companies are passed through to their owners and reported on the owners’ personal income tax returns, thereby eliminating the double taxation incurred by owners of a standard corporation, or C corporation. • Must pay nominal salary (J. Edwards example) • Ownership <75 shareholders, not other corps or LLCs • Major tax advantage over LLC • A major factor that differentiates an S corporation from an LLC is the employment tax that is paid on earnings. The owner of an LLC is considered to be self-employed and, as such, must pay a “self-employment tax” of 15.3% which goes toward social security and Medicare. The entire net income of the business is subject to self-employment tax.* • In an S corporation, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings. • have to deal with all the paperwork associated with payroll tax. The payroll tax is a pay-as-you-go tax that must be paid to the IRS regularly throughout the year--on time, or you will incur interest and penalties. The paperwork alone can be an overwhelming task for someone who is not familiar with this; and if you expect to incur losses or otherwise experience a cash flow crunch during the year that would hinder you from paying the payroll tax when due, this could present a problem.

25. C-corp Taxes With a C corporation, the net business income is subject to corporate income tax, and the monies remaining after the corporate income tax are taxed a second time when they are distributed as dividends to its owners who must then pay personal income tax.)

26. Advantage of a C-corp • Shareholders of a C corporation are typically not personally responsible for the debts and liabilities of the business • C corporations can have an unlimited number of shareholders • Ownership of a C corporation is easily transferable through the sale of stock • C corporations have unlimited life extending beyond the illness or death of the owners • Additional capital can be raised by selling shares of the C corporation's stock • Potential customers may perceive a C corporation as a more professional entity than a sole proprietorship or partnership • C corporations are generally audited less frequently than sole proprietorships • Certain C corporation business expenses may be tax-deductible • Forming a C corporation can result in self-employment tax savings • C corporations may provide a number of income and tax savings

27. Examples: LLC over S-corp for flexible for profit distribution • You and a partner own an LLC. Your partner contributed $40,000 for capital. You only contributed $10,000 but you perform 90% of the work. The two of you decide that, in the interest of fairness, you will each share the profits 50/50. As an LLC you could do that; with an S corporation, however, you could only take 20% of the profits while your partner would take the other 80%.

28. Example: S-corp over LLC for tax advantage • Mary owns a print shop • In keeping with the industry standard, Mary decides that a reasonable salary for a print shop manager is $35,000 and pays herself accordingly. Mary’s total earnings for the year are $60,000: $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Mary’s total employment tax is $5,355 (15.3% of $35,000). • If Mary were the owner of an LLC, she would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corporation, she realizes savings of $3,825 in employment tax.

29. Self employment tax • The self-employment tax rate • 12.4% for social security • 2.9% for Medicare • Only first $106,800 of total net income is subject to the social security portion of the tax. All of the the total net income is subject to the Medicare portion of the tax.

33. Financing • Starting a business can be expensive • Where is the this money to come from? • Angel investors • Venture capitalists • Your personal network (e.g., friends family) • The public (e.g., selling shares) • Loans (e.g., bank, credit card) • Sales!

34. Shares and vesting • Your company can create shares and sell them or give them in lieu of/in addition to salary • Why would you want to do this? • Raise money for business activities • Motivate owners/employees to work hard/long time

35. Peeps you may need • CPA-accountant for your receipts, taxes, whats ok to spend on • Attorneys-file corp documents (articles of incorporation, annual reports • Banks-loans, credit card, checks, registers • Advisors-wise old sages (father-in-law?, alumni?)

36. Who should be in the business? • You! • Financiers • Inventors • Business peeps People with vested interest • Scale ownership appropriately based on • investment • time worked • value added

37. Advice • Separate your finances • Separate your paperwork • Separate your office from your living space • Find mentors • Write down agreements and sign them • Take risks

38. How it works in Georgia

39. http://corp.sos.state.ga.us/corp/soskb/CSearch.asp Cost ~ $100

40. File DBA (if sole proprietorship) • “Doing Business As” Mary Smith doing business as Mary’s Turbine Emporium • open a bank account • checks made out ot Mary’s Turbine Emporium • mailing address

41. EIN • File a form SS-4 with the federal government (like SSN for business)

42. File annual documents • Annual reports • Certificate of organization • Articles of organization (internal rules) • Annual meeting minutes • …

43. Inspired? What you should do next: Ideas: thinking about ideas in classes, labs, jobs, walking across campus, sleeping People: friends, investors, mentors, business partners GO FOR IT!