Revolutionary Retailing

BUSINESS STRUCTURE

One of the first determinations you make in starting a business is how to legally structure your operation. Will you operate as a proprietorship, a corporation, a partnership, or a limited liability company?

Making this decision can be confusing. (If you are confused, you should talk to your attorney. If you are not confused, it is because you haven't talked to your attorney yet! Ha! ) I would suggest that you operate as a proprietorship until such time as you have a valid reason to choose a different structure. Several possible reasons are discussed below.

When I took over my father’s business, I continued to run it as a proprietorship for the first year. I probably would have operated a simple proprietorship for much longer if it were not for specific legal complications that arose from operating in a dual mode as both a wholesale distributor and as a retail dealer for Viking sewing machines. When I separated my wholesale and retail businesses, I went with the traditional C type corporation, the type used by the giant corporations of America. I needed to accumulate working capital for this brand new entity and it was much easier to do this at the C corporate tax rate of 15% payable on its first $50,000 in profit compared to the 28%, which I would have paid at that time as an individual or as a subchapter S corporation.

Most small businesses which initially incorporate will immediately make the subchapter S election to have the corporate profits flow directly through to their IRS 1040 tax return in order to avoid the “double taxation” issues of a corporation. Once my corporation had adequate working capital, I would pay myself an annual bonus at the end of the year so that the corporation had very little taxable income. I was required to pay a minimum taxable dividend to myself on the stock.     

The characteristic of a corporation that makes it a popular business structure, is also what makes it a headache. As “corpus,” the Latin root word for body would suggest, you have created a new body. This new “person” has a new set of special rules of operation and tax reports that will be required at all governmental levels. Even if it is a single bodied (owner) body, it is required to meet with itself once a year to pass resolutions and post them in its minute book. When it wants to open a business checking account or borrow money, the bank will require a formal signed “corporate resolution” to do so.

What NOT To Do

Why would anyone want to take a “simple” business like the sole proprietorship and turn it into a migraine headache?  The fact is, nothing is simple when it comes to owning or managing a small business. Only the relative complexities of operating your business as a corporation allow me to use the word “simple” in referring to a proprietorship. I do not know the actual data, but I would venture to guess that most folks who establish their interests as a corporation, are basing their decision on the myth of “corporate immunity.” S/he thinks, “If I borrow money to start my business and it fails, I will not lose my home to the bank.” If you are a start-up business -- or even an existing business with a sudden need for capital -- you will still be required legally to “personally guarantee” the bank loan.

I know what you’re thinking. “Well, if I have a huge uninsured loss or liability judgment made against my business, they will not be able to take my personal assets to satisfy the judgment.” It is when something like this happens that business rookies get their first good schooling in the proper way to operate a sound corporation.

It is in court where you will learn, as a defendant, from the attorney representing the plaintiff what the phrase, “piercing the corporate veil” means. The short definition is it means, “We see right through you and you tried to cheat the system”-- in other words, that you are “screwed” and will lose everything.