A Limited Liability Company or LLC is abusiness form which provideslimited liability much like acorporation. There can be an unlimited number of members to thecompany. There are also many tax benefits that emerge from forming this type ofbusiness.
Limited Liability Company (LLC) Meaning
A Limited Liability Company means that it contains the same barrier to personalliability for actions by anemployee or member of thecompany unless there is a case offraud or gross negligence. Members are unlimited, but there are limitations in that all members must be domestic. In addition, a member can be anything like aprivate equity group,corporation, or any individual as long as they are an American citizen.
Advantages of a Limited Liability Company (LLC)
Limited Liability Company (LLC) advantages range from taxes to the limited exposure by members discussed above. There are tax benefits in that an LLC has the choice of being taxed like apartnership or acorporation. The first option means that theprofits and losses will flow through to the members, but this all depends on ownership percentages or an agreement bycontract. Therefore, the IRS only taxes members once at the individual level. AnLLC can choose to be taxed as acorporation as well. This means that thecompany would have certain salaries for its members and the actual entity will taxed as a whole.
Another large benefit of the Limited Liability Company is the ability of thecompany to own its ownintellectual property. Because this is a private form, there is also greater protection from being acquired by othercompanies. This allows the company to grow at its own pace and makedecisions without having to worry about pursuit of othercompanies.
Disadvantages of a Limited Liability Company (LLC)
One disadvantage of an LLC is the cost; it’s typically more expensive to operate than partnerships and/or proprietorships. There are annual state fees when you operate an LLC. In addition, banks usually have higher fees for LLCs than they do for other entities.
Another disadvantage is that you need to separate all records – business vs. personal. The money, meeting minutes, structure, and records all needs to be separate.
At The Strategic CFO, we believe in the saying “You scratch our back, we scratch yours.” Everyone always sees other businesses as a competition; to some extent, they are. But sometimes, you just need to let peoplemake money.
As we’ve become more focused on optimizing technology, we have started to outsource tasks/projects to outside vendors nationally and, depending on the task, internationally. I was talking to my associate the other day, when we asked our vendor partner to help complete a project. She was concerned about pricing, and whether or not it was worth the money to ask our vendor to do the engagement. They charge about $25 per hour of assistance, and we needed easily 3 or 4 hours of advice.
In the past, this vendor has always stepped up and helped us. That’s because we give him business. Let’s explore why this is important…
Cutting Costs and Unlocking Value
What happens when you need to cut costs while still maintaining the same value? Everyone knows that increasing revenue and cutting costs increases your bottom line. But are you actually maintaining that value or are you manipulating that?
Let’s say you’ve already cut as many costs as you can, but you still need to cut more. This is where you have to make financial decisions… What do you value most – your profit or your relationships?
Cutting costs doesn’t mean you have to cut out the relationship forever. In fact, unless they do something unforgivable or you won’t ever need them again, you should keep that relationship open. For example, our vendor doesn’t work with us 24/7. However, we still maintain the relationship by giving him tasks once every couple of months. They act as an extension of our team.
Have you ever used (or heard of) Tinder? Chances are you’ve at least heard of Tinder, especially if you live in the United States. Tinder is a location-based, social search mobile app that connects individuals based on their interests. It’s all user-based, so if the user sees your pictures and swipes right, that means the user would like to meet. If not, then the user probably doesn’t want to meet you, and swipes left to move on to the next person. If both users swipe right, then they have a match! The process is fairly quick, and users on average swipe 30 times per day! (Good thing I’m already married, right?)
Everyone has that “Tinder” business where you swipe right when you want them, but swipe left and disregard them when you don’t need them. This is a major issue. If we all treated businessrelationships like Tinder, then we would not have a lot of value, would we? If my associate “swiped left” from the vendor and moved on to another person, we would not receive the same value. Business would be done quickly and no relationships would be formed.
Keep in mind that conducting vendor relationships is critical for your success. Think about that time when you needed help immediately… If you had a good vendor relationship, they would be able to fix the problem immediately as they already know your business. But if you were a habitual left swiper, then the new vendor would have to get up to speed… Slowing down your progress and leaving money on the table.
Healthy Business = Healthy Business
Ultimately, when you treat vendors frivolously, you’re setting examples for other businesses. Soon enough, those vendors will go out of business because many businesses use the vendors inconsistently and constantly look for a “better deal.” And what happens when that business goes bankrupt? All of the value they put into your company is now gone.
(Keep in mind, you have your own set of vendors AND you are your customer’s vendor. Healthy business equals healthy business.)
What you should really be doing is investing your money, time, and trust in one vendor per task. My associate ended up using the vendor she was skeptical about, because she realized that if she found a new vendor, we would have had to spend the time to get the new vendor up to speed and we would always be looking for someone better and cheaper. It’s a waste of time and time is money.
3 Buckets of Value
There are 3 buckets of value: cheap, timely, and/or good quality. A business can expect to have two of the three when it comes to investing in something valuable, but not all three. This is where you come in as a leader… the best way to solve this problem is to find a compromise.
Pick which bucket(s) you find more valuable. Use that as your foundation or guide to making vendor decisions.
Cheap & Timely
When I first started The Strategic CFO, I wanted everything cheap and timely because I believed in investing in something to get quality work in return. I was young and naive. Customers eat at fast food restaurants because it is cheap and timely, but it isn’t the best quality.
Let’s even use the Tinder example… Constantly looking for new vendors is a cheaper and possibly faster. However, quality is built over time, and you won’t see consistent quality over time.
So think about it… do you really want to compare your business to fast food or Tinder?
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Quality & Cheap
I was talking to my associate and she told me that she bought a makeup palette from China for only $6, when the price in the United States is $52.00. The only downside is that it took 2 months to get it in the mail! When she finally received it, it looked as if she bought it here in the US. The same concept can be applied to outsourcing tasks internationally, because of the time and language barriers. Sometimes we don’t see the work for 2 weeks to a month. This is good for tasks that don’t need to be completed right away, such as graphics for a future project.
Timely & Quality
For this example, we can use salaries. If you look at your staff, they have to be timely and of good quality. That’s why salaries consume the majority of your expenses. This is because you invest in them for your company. If we started seeing vendor partner as valuably as we do staff, the timeliness and the quality of the work might actually pay off.
Conclusion
In conclusion, you can’t treat businesses like a commodity, because they will treat you like a commodity. You can have cheap, timely, or quality work. You can expect two out of the three, but not all three. If you want to unlock value from vendor partnerships in your business, they need to know they are valued. How can we do that? Let them make money!
Although these two entities are very similar, there has always been a debate between an S corporation vs C corporation. The S corporation vs C corporation debate has been ongoing for a while. The following are some major differences that exist which may help an entity choose the proper class of corporation.
Double Taxation
In a C corporation, the entity is forced to pay Federal Income Taxes at the entity level and again at the individual level when it distributes dividends to its shareholders. This double taxation is a huge disadvantage to the C corporation. It acts as a flow through entity much like a partnership. Each individual is only taxed on their earnings from the s corp at the individual level on schedule E of the IRS form 1040.
# of Shareholders
An S corporation can only have 100 shareholders total. This is good if it is a smaller company. However, for larger companies, this is simply not possible because of the amount of cash flow needed to finance a larger corporation. Consider all family members within the S corporation as only one shareholder. This means that there is a way in which there could be more than 100 shareholders. It also means that S corporation holders can increase their interest in the business without losing the status of an S corp.
Forms of Stock
C corps can issue several different forms of stock to obtain financing for its operations. In comparison, an S corporation can only have one class of stock. The C corporation’s advantage is that it has the ability to issue preferred shares or other classes depending on its needs.
Note: This is by no means all of the S corporation and C corporation differences. However, our list includes some of the main ones that influence a company to go one way or another.
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A revocable trust is an agreement between a grantor and trustee where it transfers profit generating assets to the trustee. However, the grantor is still able to generate income from the assets. The grantor is also able to change the terms of the agreement at any point during his/her lifetime. This last point is the difference between a revocable trust and an irrevocable trust.
Revocable Trust Meaning
Many use revocable trust estateplanning to pass on a family company or perhaps some other part of the grantor’s estate to a revocable trust beneficiary. Beneficiaries are usually the grantor’s immediate family, but it can be anyone established within the contract. The main benefit is that the assets will be transferred to who the grantor desires. The grantor can still generate cash flow from the assets as well. Another primary benefit is that the grantor can change the terms at anytime to accommodate the grantor’s changing needs.
Revocable Trust Example
For example, Bob owns a bicycle shop chain named Pedal Bikes Co., which is a Sole Proprietorship. He has two sons and would like them to take over the company whenever he has passed away. Bob talked to his lawyer. The lawyer advised Bob that he should start up a revocable trust. The assets are then transferred to the newly formed Pedal Bikes Partnership under the revocable trust agreement. The two sons start running the chain while Bob comes into help them every now and then and provide oversight. Bob also receives payments from the company under the trust agreement.
When Bob passes away, the assets are then considered permanently transferred and are completely absorbed into the newly formed partnership. However, if one of Bob’s sons or both of them do not want to run the chain then Bob has the ability to change the terms of the contract to one of the sons or another party. This also insures that Bob receive payments in his later years and that his legacy lives on through his bike store chain.
Advantages and Disadvantages of a S Corporation (S-Corp)
The primary advantage of the S-corp is the tax benefit. S-corps do not have to pay corporate income taxes. Also, it offers owners limited liability protection with the S-corp status. On the other hand, establishing an S-corp can involve significant legal and accounting costs. And S-corps are only allowed to issue one type of stock (typically common stock), which can limit the entity’s ability to raise capital.
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A partnership is a type of businessorganization. Two or more individuals own and operate this business organization. These individuals are partners. Furthermore, it is unincorporated. Although it is not considered a legal entity separate from its owners, the details of this arrangement are stipulated in a contract. Call that contract a partnershipagreement. This includes both profit and loss sharing and decision-making rights.
When there is a change in ownership or a change to the original partnership agreement, this relationship dissolves. If any partner dies or leaves the organization, then the other partners must dissolve the entity and create a new partnership. When any changes are made to the original contract, the partners must dissolve the entity and create a new organization.
Advantages and Disadvantages of Partnerships
There are several advantages to having this kind of entity. Business partnerships are easy to establish and are easy to dissolve. In addition, they give the partners a significant amount of operational freedom and flexibility. Also, partnerships do not pay corporate income tax (taxes are paid by the partners at the individual level). And as opposed to a sole proprietorship, a partnership can utilize the capital, entrepreneurial skills, and managerial expertise of more than one individual.
The disadvantages include the following:
Unlimited personal liability of the general partners
A limited partnership is a private or public business owned by two or more partners, including both general partners and limited partners.
In this type of partnership, the partners share the profits and losses of the business as stipulated in a predetermined agreement. The general partners share the management and control of the business. In comparison, limited partners do not participate in management or control of the business.
In a limited partnership, only the general partners have unlimited liability for the obligations of the business. This is because the limited partners are only liable up to the amount of their original investment. This means if the partnership defaults on loan payments, then the personal assets of the general partners can be liquidated to repay the debt, but the limited partners only risk losing their original invested capital.
Consider a limited partnership private if it has less than 35 limited partners. Furthermore, private limited partnerships do not have to register with the SEC. But consider it public if it has more than 35 limited partners. As a result, public limited partnerships must register with the SEC. One can trade the ownership through brokers and dealers, but they cannot trade on public securities exchanges.
General Partner Definition
In any type of partnership – a general partnership, a private limited partnership, or a public limited partnership – a general partner is an individual who is responsible for the operations of the partnership and has unlimited liability for the obligations of the business.
Limited Partner Definition
In comparison, a limited partner is an investor whose liability is limited by the amount of capital they invested. If the partnership defaults on loans, then a limited partner cannot lose more than what he originally invested. Limited partners typically are not involved in the daily operations of the business.
General Partnership vs. Limited Partnership
In a general partnership, all of the co-owners are general partners with unlimited liability for the obligations of the business. In a limited partnership, there is at least one limited partner. That limited partner is an investor whose liability is limited by the amount of capital invested by that individual. In comparison, general partnerships are always privately owned. These partnerships can be privately or publicly owned.
