You are not selling in a flea market environment. Neither does your client. If you did, you and the business would be considered the same entity. If you sold someone a used cappuccino maker and it exploded, they would personally sue you in court. For this reason, business people take deliberate steps to separate their personal finances from their business activities as a means of personal protection. What structures do they use?
First, you need to understand that the government has a vested interest in being your sponsor. You take the risks and they take a share of the profits generated by your business. They give you plenty of opportunities to recycle money to grow the business, but they expect their share of your profits. It keeps the accountants in business. All businesses need good accountants.
The company structure is the most obvious form of organization. Almost all of the large listed companies that you can name are organized this way. A major problem with this structure is the concept of double taxation. Suppose the business earns money after paying its expenses. This profit is taxed by the government. The tax rate is 21% (1) But the money is still held within the company. It leaves the company and passes into the hands of the shareholder through the payment of dividends. These are taxed as income on the individual’s tax return. This is what is meant by double taxation. The structure of the company, although complex and expensive, can allow the company to provide various benefits to its employees.
The most important benefit of this corporate structure (and others) is the corporate veil or personal liability protection.
The limit partnership structure is a way for a few people to do business together. Often there is a general partner and limited liability partners. From the headlines you can see that one has unlimited liability and the others do not. a more familiar term is limited liability company Where LLP structure. In this case, all partners have the same level of personal protection.
You heard the expression Limited liability company Where SARL before. Its structure is similar to that of the LLP above. One of the main advantages of this structure is to avoid double taxation. The profits of the business are distributed directly to the partners or owners, who are then taxed at their level of income tax.
You have also heard of Body S, which offer some of the advantages of the corporate structure along with the advantages of the partnership structure. The profits of the business (losses too) are transferred directly to the owner, who pays taxes at his individual rate.
The last structure we will look at is the Individual business. This is where you are the business and vice versa. There is no corporate veil between your professional life and your personal life. In this situation, the profits are taxed as personal income.
The advantage of the corporate veil
No one wants to be held personally responsible if it can be avoided. For this reason, companies are often configured as an arm’s length relationship. If the business fails, under ideal circumstances, you don’t want to be held responsible for its debts. In reality, a bank lending to a new business will want your personal collateral before putting their money at risk. Butr for big problems, the structure offers protection.
But you have to walk the promenade and speak the conversation. The out-of-pocket flea market vendor cannot claim that this was a separate company that sold the exploding cappuccino maker.
- Incorporation. The company must be formally established, structured and registered with the State.
- Deposits. The business must file income tax returns and other documents separately from your personal returns.
- Bank accounts. The business needs separate accounts from your personal accounts.
- Credit line. It is difficult to lend the business your own money whenever it is needed. You want the business to have the ability to borrow when needed for short periods.
- Credit card. You will have expenses related to the business. These should also be at arm’s length.
- Expenses. There will be times when you will be spending personal money on business expenses. One example is the use of your own car to get to the airport. You must document reimbursable expenses.
- Telephone. If your business is made up of two separate entities, you also need a phone number for the business entity.
It is important to understand these structures if you are starting your own business. It’s important to understand why your small business clients choose the structures they choose. Either way, if you want to be in business, you need a good accountant.
Bryce sanders is President of Perceptive Business Solutions Inc. He provides training on HNW client acquisition for the financial services industry. His book “Captivating the Wealthy Investor” is available on Amazon.