What’s Foreign Entity in Business?

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Foreign Entity

10.23.17

Starting a business can be a pretty confusing process. There are a lot of terms and paperwork that you need to become familiar with in order to make sure that your business has completed all of the legal obligations it needs to operate. One of the terms and concepts you should be familiar with is something called a “Foreign Entity” – sometimes called a Foreign Limited Liability Corporation.

A foreign entity is a corporation that is incorporated one state but does business in another state. Due to being incorporated in another state, perhaps for tax reasons in Delaware, the state where you actually do business sees your corporation as a foreign entity. Here are a couple examples of when you would need to file as a foreign entity:

  • You decided to use Business Solutions to incorporate in Delaware but your store is physically located in Michigan. In order to legally conduct business in Michigan, you will need to file a Foreign Corporation Certificate.
  • You and your business partners are scattered across the United States and have initially worked out of your home state where the business was incorporated. Now, you business partners are starting to offer your business’s services to clients that live around them. Since they are conducting business under the umbrella of your corporation, you would be considered a foreign entity in those states.
  • If you opened up a store in Michigan and are incorporated in Michigan and now you want to expand to Ohio, you would be considered a foreign entity in the state of Ohio.

The Benefits of being a Foreign Entity

You may be wondering what are the benefits of being a foreign entity. From the sounds of it, you might think that it’s just more paperwork and fees. However, that’s not the case. Incorporating in a different state, like Delaware, has benefits that far exceed the relatively small cost of filing a Foreign Corporation Certificate. Here are two main reasons why you should incorporate in Delaware, no matter where you do business:

The Court System – The quality of Delaware courts and judges are second to none when it comes to corporate law. The court system even has a special court called the Court of Chancery that specializes in corporate law disputes without juries. Instead of months and sometimes years of waiting for time on a judge’s docket due to non-corporate cases, the Court of Chancery offers businesses the expectation that corporate legal disputes are addressed promptly and by specialized judges. It also helps that the Delaware’s Court of Chancery dates back to 1792, providing some predictability to potential rulings.

Up-to-date Legal Framework – Delaware prides itself on having up-to-date laws that spell out what companies can and cannot do in the 21st century. Delaware’s General Corporation Law provides guidance to business entities and Delaware’s tax law is kept up to date, with 4 tax legislation bills proposed and passed in June and July of 2017 alone!

Lastly, it’s important to file the proper Foreign Entity paperwork in your state so that your business is legally operating in that state. If you don’t, your company may be subject to fines, have to pay back taxes that could be crippling to your business and you lose the ability to sue in that state.

In essence, incorporating in a state like Delaware and being a foreign entity in the state where you do business has long term benefits. Since LLCs are registered at the State level and not the National level, your LLC is eligible for all of the benefits and protections of the state you incorporate in. In Delaware, that means the friendliest court system towards business, predictable rulings, and up to date regulations so you and your business are always clear on what you can and cannot do.

Online Businesses

You’ve now read through all of this and may be thinking about how you’re not sure if your online business needs to register as a Foreign Entity. As an online business, you technically do business in all states, or at least in more than one – so do you need to file for Foreign Qualification in all of them? Not exactly. If you are incorporated in a state and conduct your business online, either shipping products to another state or offer consulting services virtually, you more than likely don’t need to file the Foreign Qualification paperwork. However, states are becoming more and more creative around how to define Foreign Entities. While you most likely don’t need to file this instant, it’s important that you keep up to date on the foreign entity qualifications in the states you do business in.

The Rub

Being considered a foreign entity in the state you conduct business in is a common practice that offers a lot of benefits to a business and a business owner. Completing the paperwork in the states where you conduct business will allow you to legally operate your business and pay the necessary taxes to that state, helping you avoid any fines or back taxes for operating illegally. The small cost of filing Foreign Entity Qualification paperwork is nothing compared to the long-term benefits of incorporating in a business friendly state like Delaware.

Setting Up your LLC with an S-Corp Designation

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Setting Up your LLC with an S-Corp Designation

10.19.17

One of the biggest and hardest decision that new entrepreneurs make when starting out is if they want to incorporate as a Limited Liability Corporation (LLC) or as a Small Business Corporation (S-Corp). Both designations offer unique advantages and it’s important to know the benefits of both. If you haven’t had a chance, make sure to check out our article about the three main types of corporate entities.

What you may not know is that you can have your LLC treated like an S-Corp to gain the tax advantage of S-Corps while protecting yourself through the LLC. In this case, you can have the best of both worlds.

Taxing S-Corps

Like an LLC, S-Corporations are a pass-through entity. This means that any income or loss from the company passes through the incorporation to the owners’ personal tax return. Every year, a S-Corporation files Form 1120S where income, gains, losses, deductions, credits, etc. of a domestic corporation or other entity for that tax year are reported. Just like an LLC, the pass-through designation allows S-Corporations to avoid double taxation on corporate income.

The place where an S-Corporation really differs from an LLC or any other partnership is how owners are viewed for tax purposes. In the case of S-Corporations, owners are viewed as employees who work for the business and will be taxed not as an owner, but an employee. This is a key difference that makes S-Corp designations for LLCs a very popular choice.

Breaking it Down

Let’s say that you formed your own LLC and your company is making a profit of $200,000 a year. As the sole owner, all of that “passes through” to you and is included in your income tax filing at the end of the year. Using the IRS’s current rate of 15.3% for self employment tax and Quickbooks’ free self-employed tax calculator, we can see that the total tax owed would be $30,600 with $24,800 going to Social Security and $5,800 going to Medicare. As you can see, Medicare and Social Security tax can add up pretty quickly and make up a substantial amount of your end of the year taxes.

However, if you elected to have your LLC taxed as an S-Corporation, you could save some money when it comes to Social Security and Medicare. Imagine that your company that has elected to be taxed an S-Corp made a profit of $200,000 last year. Because you are now an employee of your company and have to receive a “reasonable salary” according to the IRS, you receive a salary of $100,000 a year. Your salary would be taxed at the same self-employment tax rate as above but you would be paying only $12,400 in Social Security tax and $2,900 in Medicare Tax. The remaining $100,000 is reported as an S-Corporation distribution on your tax return, not employee salary. You will still have to pay State and Federal income tax on that amount, but you will not have to pay Social Security and Medicare tax. The S-Corporation tax designation is the only business entity form that allows owners to save on Social Security and Medicare taxes.

And if you’re asking, no, you can’t give yourself no salary and completely save on Social Security and taxes. The salary you receive must be similar to other positions in the same field.

Electing S Corporation Status

You have now seen the benefit of pursuing an S-Corp tax designation for your LLC but how do you do it? No LLC automatically starts out with the S-Corp designation but it is a relatively easy process. All that is needed is for you to file Form 2553 with the IRS and meeting the basic requirements of an S-Corp:

  • There is only one class of stock – i.e. no special rights certain owners or employees
  • There are no more than 100 shareholders
  • The shareholders are not other business entities

You have 75 days from the formation of your LLC to file for an S-Corporation designation and the IRS recommends that you take your time to file for designation as it would like you to begin conducting business before filing. Additionally, if you missed the filing date, there are a multitude of exceptions that would allow you to file after the date. Rev. Proc. 2013-30 provides specific guidance for late action relief. If you find that your LLC wouldn’t qualify under any of those exceptions, you can also request a letter ruling for a fee here.

It’s also important to remember that once you select this designation, you can’t submit to change your designation for another 60 months unless with special permission from the IRS.

Keep in Mind

There are a couple of things you should keep in mind before electing S-Corp status for your LLC.

  • Most LLC entities begin with an operating agreement that is either prepared by a business attorney specifically for an LLC or use an operating agreement template from an online website. It’s important to review your agreement so that it meets the requirements of an S-Corp in regards to tax issues and ensuring that there is only a single class of stock. Your LLC should meet the requirements of an S-Corporation at the time of filing.
  • S-Corporations allow you to save money on Social Security tax and Medicare tax by treating you as an employee. Your salary will be taxed but additional distributions will only be subject to state and federal income taxes, not Social Security and Medicare.
  • File for an S-Corporation designation within 75 days of forming your LLC using Form 2553.
  • With an S-Corporation, your shareholders need to be either U.S. Citizens or U.S. residents. With an LLC or C-Corporation, they do not.

Do I need an Accountant?

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Should I Hire an Accountant for my Business?

10.17.2017

Bookkeeping, one of those necessary evils that every business owner must become familiar with. You may think that the only reason you have for keeping the books for your business is so you know how much money you need to pay for taxes and so you can file your yearly earning report with the government. However, bookkeeping is an important tool that helps you make better decisions for the health of your business. This article will explore the three options you have for keeping up with your business’s financial records:

  • Doing it yourself
  • Hiring a bookkeeper
  • Hiring an accountant

You’re Doing It All!

You started your business because you have a vision for a product or service. You incorporated your business, you’re sending sales emails, you’re meeting with clients, and you’re growing your business. On top of that, you’ve been keeping track of your company’s financial transactions. You didn’t go to school for finance but you’re learning on the job about what it means to be a business owner and how to manage your company’s finances. Fortunately, there are services out there that can help you meet your company’s accounting needs. We also provide Merchant Maverick rating as a quick review (we have no affiliation, just think that it’s a quick apples-to-apples comparison between the two popular options below).

Intuit Quickbooks

Intuit Quickbooks is one of the most respected accounting software subscriptions out there. The cost of Quickbooks ranges from $10 – $35, with the current discount, depending on the types of services you require. Quickbooks offer a wide range of reports, customizable invoices, inventory capabilities, payroll support, multiple currencies, integration with multiple accounts and a beautiful user interface that keeps you up to date on your most important Key Performance Indicators (KPIs). Additionally, the software just added a project management feature to help small businesses track and manage progress towards large tasks and initiatives.

Quickbooks also offers a cloud-based platform as well, which for an owner that is constantly on the move, is a must. You can access your business’s key financial information from any laptop via their secure online portal and track expenses and deposits in real-time. Reconciling your bank account has never been easier.

Merchant Maverick Rating: 4.5 out of 5

Xero

Another great software is Xero, an accounting solution that is based out of New Zealand. Xero’s motto is “beautiful accounting software” and that is visible with every click. Just like quickbooks, the user interface is very appealing and the product offers a lot of services. Pricing can range from $9 – $180 a month depending on the size of your company. Unlike Quickbook, Xero is an accounting solution that your company can grow into and it is one of the most preferred solutions for medium to large companies. One of the biggest appeals of Xero is that it offers unlimited users, a luxury that many other services, like Quickbooks, charge extra for. Some of the capabilities that Xero offers are expense tracking, invoice creation, bank transaction tracking, billing, live bank feeds, customizable reports W2s and 1099 creations, multi-currency support, payroll options and contact management. Additionally, just like Quickbook, this is a cloud-based platform that you can access from anywhere and from any device.

Merchant Maverick Rating: 5 out of 5

The Best Use of Your Time?

Ultimately, you have to decide if managing your business’s financial reporting is the best use of your time. As a young business, you may be able to devote two hours of your time to keep up to date with your accounting, but as your business grows the responsibility and time commitment will only grow. Should you be focusing on your bookkeeping or on sales, or app development, or the reason you started your business?

The answer may not be as obvious as it seems. Maintaining your own books may seem tedious, but many entrepreneurs and small business owners see it as a necessity. By maintaining your own books, you have an intimate financial knowledge of your business, and it can help you foresee potential issues coming up.

If you do decide to get help on your bookkeeping from the outside, you should continue to review your books regularly (at least monthly), so that you don’t lose the context on the financial side of your business.

When it comes to outsourcing your company’s financial responsibilities, there are two types of financial professionals to consider: a certified public accountant (CPA) and a bookkeeper. Each have very different skills and rates and it would be up to you to decide if you want to retain one or both.

Bookkeeper

Bookkeepers perform day-to-day tasks like gathering and organizing employee timesheets, submitting purchase-orders, collecting payments from clients, preparing bank deposits and entering all financial transactions into whatever accounting software or recordkeeping software you use. Depending on if you hire from an accounting agency or through the classifieds, a bookkeeper might come with a wide range of skills. Study.com’s bookkeeping career guide lists as only needing a high school diploma as the minimal education requirement. However, there are opportunities for bookkeepers to obtain a bookkeeping certificate through the American Institute of Professional Bookkeepers. Certification bookkeepers will already know how to record costs, analyze financial statements and use the major software programs. Depending on the tasks and the market, a bookkeeper will charge around $25-$35 an hour.

Many small businesses choose to hire a part-time bookkeeper until they can justify hiring one full time. To find a bookkeeper, ask an accountant for recommendations or skim through resumes on the online job forum from the American Institute of Professional Bookkeepers.

Always ask for business references before hiring a bookkeeper – and make sure you talk to those references to see if they were able to perform the job at a satisfactory level. Remember, this is YOUR business you’re asking them to bookkeep for.

Certified Public Accountant

A certified public accountant (CPA) is someone who has been certified by a state and has passed all of the necessary exams and certifications to meet the state’s legal requirements. More often than not, CPAs have went to a four year college with a concentration in finance and accounting. CPA certification requires some graduate-level coursework and passing 4 CPA exams. States usually require accountants to complete at least two years of work experience before taking the certification examinations. The added certification and educational background of CPAs allow CPAs to tackle more complex and high-level tasks. Some examples are your quarterly financial reports, state specific tax filings, business analysis and processes and may even offer advice.

The typical cost of a CPA is around $100 to $300 depending on task complexity and the current market. Word of mouth is always the best when hiring a CPA but if you find yourself with no leads, check out the National Society of Accountants to find CPAs near you.

As as with hiring a bookkeeper – vette your CPA! Ask for business references, call or meet with those references and make sure they CPA is honest and trustworthy, capable and knowledgeable.

Things to Keep in Mind

Here are a couple of things to keep in mind regardless of which financial accounting route you choose:

  • Even if you outsource your business’s financial reporting and auditing to a bookkeeper or CPA, ultimately, you are still responsible for everything that gets filed with the state and federal government. That means if they make a mistake, you’re still responsible for the repercussions. That’s probably why they have Errors and Omissions (E&O) insurance It’s important that you are in constant communication with your financial accountants and that you review important documents before submitting them to the state or IRS.
  • The range of skills between a bookkeeper and accountant varies. Hire to best match for your company. If you are just starting out, you probably don’t need to hire a full-time CPA (and you should probably do the bookkeeping yourself!)
  • Determine where your time is best spent. Think about if you are able to and have the time to do your own accounting or to outsource. Where are you the biggest assett to your business and your clients?
  • An accounting system is more than just filing government required paperwork. It’s there to inform you about the health of your company and impact decisions so you can grow your business the right way.

How to start an LLC

How to start an LLC

10.5.2017

One of the first things that business owners do when starting their business is form a Limited Liability Corporation (LLC). Unlike a C-Corp or S-Corp, an LLC is very flexible and offers several advantages. If you want more information on what a LLCs, S-Corps or C-Corps are, read our article here. In the meantime, here are a few that stand out:

  • No residency required: If you don’t live in the United States or are not a U.S. citizen, you can still form an LLC.
  • Legal Protection: You only stand to lose what you have invested into the business. If your company is sued and the resulting judgement is more than what the company can afford, the members of the LLC aren’t personally liable to pay the judgement or make up the difference (with few very specific exceptions). Your house, personal property, and your family are safe.
  • Easy tax returns: With an LLC, you may not need to file a corporate tax return. You can just report your share of profit and loss on your individual tax returns. This streamlines the tax filing process and helps you avoid double taxation.
  • Low start-up cost: Starting an LLC is a relatively cheap process. The cost of forming an LLC is state dependent and can range anywhere from $50-$300 or more. For example, Delaware’s Certificate of Formation of a LLC is $90 with a $50 fee if you want it processed in 24 hours.

However, there are a couple of disadvantages to opening up an LLC. Here are some:

  • Can’t issue stocks or shares: With an LLC, you won’t be able to offer shares of stock to attract investors. Because of this, you may face a limit on how much you can grow.
  • Treated differently state to state: Each state has different laws on how the requirements of LLCs and how they deal with them. Delaware is the most popular state to form LLCs but if you choose to form one elsewhere, make sure you weigh the pros and cons of forming in that state. Each state is different!

Is an LLC right for me?

That depends. It’s important to think about your plans for the future of your company and how you want it to grow. An LLC might be for you if:

  • You want a business entity that offers limited liability to its members
  • You need flexibility in sharing profits between owners
  • You want minimal formal documentation
  • You want to be flexible in your accounting
  • You don’t want to be forced to meet the meeting requirements imposed on Corporations.

Starting an LLC

Starting an LLC is a relatively simple and painless process. The basic steps to starting an LLC are:

  1. Choose a legal name and reserve it (Optional)
  2. Obtain a Registered Agent (Like us!)
  3. Draft and file your Articles of Incorporation with your Secretary of State
  4. Decide who will run your business / Operating Agreements
  5. File form SS-4 or apply online to obtain an Employer Identification Number
  6. Obtain the other necessary state specific documents and ID numbers (each state is different)

1. Choosing a Legal Name:

Your business name is how the state identifies your business. Each state has different regulations around what is required of a business name. Most states don’t allow you to register a name that’s already been registered and some states even require your name to reflect the kind of business it represents. In Delaware, you can reserve a name for $75 if you’re not ready to file your official paperwork yet. Your reservation will be effective for 120 days and you can find the reservation paperwork here.

2. Obtaining a Registered Agent:

Most states, including Delaware, require that every business entity have and maintain a Registered Agent in the state where the LLC is formed. The registered agent must have a physical address in Delaware. A registered agent is required to be available during normal business hours and will forward you any important communication as it arrives. For more information on registered agents for Delaware (the most popular state to file), visit the State of Delaware page.

3. Drafting and Filing your Articles of Incorporation

Articles of Incorporation are documents that establish your corporation as a separate business entity. The articles are considered to be public record and provide information like the entity’s name, contact information and any information about shares and stock (not applicable to an LLC). Sample forms, instructions, and fees can be found on your state website. For Delaware, that information is found on Delaware’s Division of Corporation website. Once you submit your paperwork, expect the state of Delaware to process your incorporation in about 3 weeks. At the type of formation, you can also request a Certificate of Good Standing for an additional $50. Some financial institutions may require a Certificate of Good Standing when doing business with your LLC (like opening a company bank account).

4. Deciding Who Will Run Your Business / LLC Operating Agreement

If you are the sole owner and employee of your business, then this is an easy decision for you. However, if you have multiple partners or already are thinking of hiring a team to help you, it’s best to figure out how decisions are made and who will be making them. All of this lives in an important document called the LLC Operating Agreement. The operating agreement can outline:

  • How profits and losses will be split
  • How and when meetings will take place
  • Succession planning – procedures for buying out or transferring ownership
  • Roles and responsibilities of key positions and members
  • Specific rules for your company – not state specific ones
  • Voting rights
  • Any other important business considerations

The state of Delaware does not require that you file an Operating Agreement publicly, but you will want to create one to protect your business and to also give it direction and clarity as it grows. Additionally, a bank may require you to provide a copy of your Operating Agreement if you wish to open a bank account for your LLC (but not always). If you would like look at some Operating Agreement templates that cover Single-member LLCs to Multi-Member LLCs with Member Classes, check out Harvard Business Services’ page on Operating Agreements.

5. Obtaining an Employer Identification Number (EIN)

Once you have formed your LLC and have drafted your Operating Agreement, it’s time to obtain an Employer Identification Number (EIN) for your business. The EIN will be how the IRS identifies your business entity and will determine how it will be taxed. Obtaining an EIN is as simple as either filling out Form SS-4 and faxing it to the IRS or applying online on the IRS website. Some incorporating services often charge a fee for obtaining an EIN but this is something that is free to do and you can obtain an EIN instantly if you apply online.

6. Obtaining State Specific Licenses

The State of Delaware has a great infographic on the requirements for registering a business in Delaware. One registration requirement that many new business owners overlook is the need to obtain the correct business licenses and contacting the appropriate state agencies to inform them of the creation of your new business entity.

The State of Delaware makes this easy for new business to register with the necessary state agencies, like the Division of Revenue, Division of Unemployment Insurance and the Office of Workers Compensation, through their One Stop Business Registration and Licensing System. License Fees also vary on the type of business you start so make sure you check out the license fee chart to get a better understanding of additional start-up costs.

Big Takeaways

Forming an LLC is one of the smartest decisions you can make for your business and it’s relatively easy. However, it’s important that you take a moment to not only familiarize yourself with state specific LLC laws, but also determine how your company will function. Think about how you and your partners, if you have any, are going to split responsibilities, profits, losses, and make decisions. Create a plan of what agencies you are going to contact and make sure that you obtain the right certifications and license for your business. Lastly, figure out how all of this is going to get done – are you going to hire a business service to do this for you or are you going to tackle it yourself? Once you have all of that figured out, you can finally begin being your own boss!

What Type of Insurance Does Your Business Need?

What Type of Insurance Does Your Business Need?

Setting up a business sound exciting but can come with a lot of risk. When you opt to step out of corporate culture and start working on your own venture, you need to keep an eye out for a number of factors necessary for your success. This includes location (if you have a physical business), markets risks and unexpected events that could negatively impact your business..

Not all of these things can always be accounted for, but insurance on your business can at least help you prepare for unexpected events that could impact your business.

Once you’ve started your business, ensuring that you are covered from unexpected loss is very important. Small businesses and fledgling start-ups can usually not absorb catastrophic events and end up closing. That’s why, before jumping into a business, it is important to make sure that you understand the insurance options available to you and which ones you want to have for your business.

First, the basics – an insurance policy meant to pass off the risk associated with an unplanned mishap. A good insurance policy can save a business from closing permanently due to a catastrophic loss. But it’s important to understand the details of insurance policy options before you go to start a business, to make certain you have the coverage you need (and make sure you don’t buy coverage you won’t need) and understand what’s actually covered and what’s not.

In the US, insurance is bought through a broker, who is trained and licensed by each individual state and can suggest the right specific provisions for you business. These brokers have a legal obligation to talk you through the types of insurance your specific business might need and only offer you insurance that fits your company. Use these brokers as a resource to evaluate different plans, and don’t hesitate to ask them questions. Do keep an eye out though, some brokers are more helpful, diligent and honest than others, so it may make sense to compare policies from more than one broker to make sure you get the right information and the best deal for your coverage.

Not all businesses need every type of insurance policy, but all businesses likely need some of the options to be adequately covered. Choosing the correct insurance products to suit your company’s needs is actually quite straightforward and largely depends on what type of business you operate,  how large it is and what sort of assets you need to protect.

Let’s review some of the most common types of insurance that might apply to your business:

General Liability Insurance

General liability insurance is the most common type of insurance and the insurance that almost all businesses should get. For businesses, it can be referred to as “Commercial General Liability Insurance” and covers the risk of being sued by third parties for negligence. That means specifically that it covers harm that comes out of carelessness; i.e. if you don’t exercise “reasonable care” in your actions and someone gets hurt, they may sue you. General Liability Insurance will help pay for legal coverage and damages that may come out of the lawsuit.General Liability Insurance generally has broad provisions that apply to most businesses but also have specific provisions that should fit your business and the product or service that you’re selling.

General Liability insurance generally covers a broad range of risks that can occur on during your business operations, from someone getting injured on your property, to advertising injury (i.e. if you get sued for false advertising and slander/libel) among other types of cover. It is usually combined with property insurance as well (property insurance covers your business property – like the physical location of your business).

General Liability Insurance generally covers third-party lawsuits, including those triggered by the following events:

  • Any accident or bodily injury in your business space. For example: A client slipping and falling in your office and breaking a bone
  • Property damage (if you have property insurance). For example: When the owner of the corporate space or landlord holds you responsible for a fire incident occurred at your office. The lawsuit might cover charges like damage to the overall structure of the building due to an incident in your office.
  • Copyright infringement. For example: When a rival files a lawsuit over creatives or content that might look like theirs.
  • Reputation and brand image damage. For example: If you’re too agressive in describing your competitor’s flawsin your advertisement or social media content and you slander or libel them. They can file a lawsuit for damaging their brand image.

As small business or startup, you need some type of coverage under business liability insurance to protect your company from uninvited damage. Often the costs associated with a lawsuits get more out of hand than the incident itself and they might damage you in multiple ways or end up with unimaginable fines that can leave your business bankrupt.

There is no such thing as a “standard” policy – while there are some standards on what’s generally covered, different companies will interpret different claims based on their own policies. Don’t be afraid to ASK your broker what’s covered and pepper them with questions to make sure you really understand what you’re paying for.

A few types of insurance that General Liability Insurance doesn’t cover but you might consider getting includes:

Professional Liability Insurance

Professional Liability Insurance, more commonly known as errors and omissions insurance (E&O) protects businesses against the risk associated with providing professional advice and services. Specifically, it helps pay the legal costs with defending a negligence claim made by a client or customer and any damages awarded in a civil lawsuit tied to a service that you provided. Specifically, it’s targeted to cover “failure to perform” (i.e. not doing what you are supposed to be doing as a service provider), financial loss caused by negligence, and errors or omissions in a service or product sold (i.e. you represented that a service was fully complete, but you made a mistake in the description or filing).

It’s different from general liability insurance because general liability deals with physical mishaps that might happen at your company (e.g. someone slipping and falling), professional liability deals with damages not related to actual physical damages.

Some examples of when Professional Liability Insurance would get triggered included:

  • A customer that hired you to develop a piece of software for them. They give you specifications for the piece of software and you sign a contract to build it for them. You deliver the software and they use it for a month. You misrepresented what the software can do and they suffer major financial losses. Because there was no physical damage or advertising damages, this loss could not be covered by general liability insurance. But if the customer sues you, professional liability insurance will help pay your legal expenses and any damages that need to be paid out. This could save your business.
  • All doctors and lawyers have specialized Professional Liability Insurance for their medical and law practices. These policies are specialized for their professions, but are necessary because of the high liability claims that often come in these professions.

The reason why many business owners prefer picking up errors and omissoins insurance is that this policy can vary in a great way as per needs of your business and its overall insurance policy. The exceptions that aren’t covered in some cases are temporary employees, claims against work done prior to the contract of insurance, etc. It is to be noticed that Errors and omissions insurance policies are different for each company depending on their nature and business type. As with General Liability Insurance, a licensed broker will help you create a policy that is right for your business. A good licensed broker will take the time to understand your business and the risks associated with it to put together a policy that will fit your business. If they don’t, find another broker.

Directors and Officers Liability Insurance

This is a type of liability insurance (referred to as D&O insurance) that covers the upper management your company (i.e. you as the owner of the company!). These include your board of directors and executive management and other officers of your company. It protects them against loss associated with legal actions brought against them while they were a director or officer of the company. It can (but not always) also cover defense costs associated with criminal investigations and legal claims. It does NOT cover illegal acts that are intentional. For public companies, companies buy directors and officers liability insurance to make sure that their management is not liable in lawsuits brought by shareholders (usually happens when a company does not do well financially). In private companies, this insurance generally covers management in case they are sued personally for business decisions they make (usually by an investor). Even though, in most cases, your personal assets are safe, there are still costs to defending yourself – D&O insurance covers this.

Property Insurance

As the name suggests, this type of insurance protects the company against any financial reimbursement to the landlord of your office space. It might also include other contents and facilities that came along with the rental contract. Usually, these lawsuits are filed by the owner of office space. They may also include damages to the property due to a natural catastrophe (though not all natural catastrophes are covered, make sure to know what’s covered and what isn’t). When a lawsuit is filed, the insurance policy will reimburse any damages. Almost every single landlord will require that you have this type of insurance when you rent office space from them. This is probably one of the most basic and common types of insurance available and is often bundled with Commercial General Liability insurance covered above.

 Examples of incidents covered by a property insurance policy:

  • Damages caused by a fire incident or a short circuit.
  • Damages caused by any kind of smoke eruption.
  • Damages caused by weather conditions, such as heavy snowfall, rain or thunderstorms.
  • Damages caused in a robbery or theft.

It covers the property renter (business owner) against any possible lawsuit pertaining to space or area to use. However, it doesn’t include water damages caused by drained pipelines, leakages, boilers, ground seepage, standing water and related reasons. It also doesn’t include the damages caused by molds since they are also a consequence of a possible leakage.

Workers Compensation Insurance

Workers compensation insurance covers your team and the key players associated with your business. They render you their services and knowledge while you offer them a good salary package and protection in return. This policy comes into action when something unexpected happens to one of your employees.

Worker’s compensation insurance can help if:

  • An employee is injured in an auto accident while running errands for the company
  • An associate develops carpal tunnel syndrome from working on the computer
  • An employee gets hurt while restocking the supply room

Workers compensation insurance \can:

  • Pay for an injured employee’s medical treatment
  • Replace part of lost wages if a job-related injury requires time off work
  • Protect your business and assets

Business Interruption Insurance

This policy comes into action when your ability to do business stopped by an unforeseen reason.. Mostly the reason behind this can be a catastrophe that completely terminates the operations of the business. This type of insurance is mostly fused for businesses that require a physical location and inventory function such as a super markets a packaging company. While your revenue stream and manufacturing are halted, this policy covers for your basic expenditure like salaries of your staff. The intent of the policy is to put the business in the same financial position as if the loss had not occurred.

This type of insurance is usually not offered as a stand alone, policy, you have to add it to your property insurance as an add-on.

Home-Based Businesses Insurance

Many people start their companies by working from home. Wether that means you use your garage as a storage space for inventory, or your kitchen to make your world famous cookies that you sell, you may need insurance to cover your home based business. Typical home owners insurance policies specifically exclude business inventory and other business related coverage, so this type of insurance may make sense. Home-based business insurance policies are not very common and like many insurance policies, there’s not real standard. Your broker will help design a custom plan that fits your home business, but make sure to understand the coverage so that you’re not underinsured or you’re not paying for types of insurance that doesn’t apply for your business.

Commercial Auto Insurance

This policy, as the name suggests, is for vehicles and means of transport that the business owns and that is specifically used for business. If there is a vehicle or transport medium used regularly in a business process, it can be insured under the commercial auto insurance policy. It covers any bodily or property damage during commuting in those vehicles. For example, in case of any accident, it covers your medical costs as well as damages to the vehicle or to other physical objects. If you don’t have a business vehicle, this insurance does not apply to you.

Umbrella Policies

An umbrella policy covers anything that doesn’t fall under any other category of insurance opted by the company or exceed their limits or contracts. These policies are flexible and can be designed as per the needs of the business. The price is highly variable depending on what you want insured.

There are many types of insurance policies available. Most businesses have General liability insurance and property insurance. Service businesses, generally also have errors and omissions Insurance (aka professional liability insurance). Find a broker that can help you figure out what the right coverage is for your business.

Everything You Need to Know to Determine If an LLC Is Right for Your Business

What is an LLC?

LLC is an abbreviation which stands for ‘Limited Liability Company’. This is specifically a United States based form of a company in the private sector. An LLC exhibits the properties of both a corporation and a partnership but is neither of them. The number of owners determines whether it is treated as a partnership or a sole proprietorship.

Features of LLC

LLC, like a corporation, gives its owners limited liability and the availability of flow-through taxation to all the co-owners. An LLC, when established, is ”organized” and the founding document of an LLC is referred to as the “articles of the organization”. An LLC is governed under an operating agreement.

If you want to open an LLC, we’ve provided the information that you need to decide if it makes sense for your business and a step-by-step process for how to establish an LLC in the state of Delaware.

So, why pick an LLC?

Here are the advantages:

Reduced Paperwork:

As compared to other types of business, Limited Liability Companies require less paperwork. Handling the paperwork and keeping it safe is not an easy task and there is a high risk that important paperwork might get misplaced or damaged. There are less stringent compliance requirements, reducing the amount of paperwork you need to file annually. For examples, corporations require regular board meetings with minutes of the meetings logged – LLCs don’t have these requirements. The bare minimum of filing requirements generally amounts to an annual Statement of Information and not much else.

Tax Flexibility:

Another feature that is a major reason why people opt for this type of business rather than other forms is tax flexibility. The Internal Revenue Service (IRS) does not consider LLC a separate body for the purpose of taxation; so the IRS does not impose taxes on an LLC directly, it depends on how the members of an LLC opt to pay the taxes. LLC members have three choices for the payment of the tax.

  1. LLC as an S-Corporation or C-Corp: the LLC can choose to elect themselves as a corporation and pay taxes the way a corporation does. This must be elected by filing with the IRS (generally within 75 days of establishing your LLC).
  2. Partnership: This is the default for multi-member LLCs and the IRS does not view the LLC as a different entity than the partners (for tax purposes). That means the partners get pass-through taxes – that is to say, they pay as if it’s their own income.
  3. Single Member LLC: the default for single member LLCs. Taxes are imposed as a single member’s personal federal tax return.

All this is decided at the initial stage of the establishment of an LLC. 

Limited Liability:

As the name suggests, this form of business provides limited liability to its members. Just like corporations, members of an LLC are not held liable for issues such as debt, court judgments, and other legal issues that may come up while doing business. The greatest advantage of an LLC is that the creditors cannot go through the personal assets of the LLC members to recover their amount, so if you take a loan out in the LLC’s name, but can’t pay it back, the bank cannot come after your personal property. Do keep in mind, for young LLCs, banks will often ask for a personal guarantee when taking out a loan. That means that you basically act as a co-signer to the LLC and the bank CAN come after you to collect on the loan if the LLC is not able to pay.  This advantage, however, is not available in a business partnership or sole proprietorship.

These three reasons make LLCs preferred for new businesses that prefer to stay lightweight with low filing requirements but still want the limited liability offered by organizing.   

However, not everything is perfect and there are disadvantages too.

The Disadvantages of an LLC

Short Lifespan:

Unlike a corporation, if any of the members decide to leave an LLC, the LLC has to be shut down. It is not easy to add or remove members. A corporation stays intact even after some of its shareholders decide to part their ways. Neither the profits nor the working of a corporation is hindered; for an LLC, you have to shut down and reorganize as a new LLC.

Tax Issues:

Like we discussed in the tax payment methods of an LLC, the members of the LLC have three choices. They can either register themselves as a single member LLC, a partnership or a corporate. In both cases, a single member LLC or a partnership, the owners are subject to self-employment taxation. This type of taxation is higher than that imposed on a corporate. In the self-employment taxation, each member of an LLC is subjected to pay for expenses like Medicare and Social Security, etc.

Specifying Designations:

There are specific designations in a corporation such as employees, managers, directors etc. Unlike a corporation, there can be some confusion regarding the roles of members of an LLC. Because there are no specified designations or roles in an LLC, the terminology and roles can be confusing. In the operation agreement (part of the articles of organization), you can specify roles and responsibilities. But you don’t have to, so if the LLC is small and you already know who’s doing what, you can skip being explicit.

A major part of these highlighted disadvantages can be overcome during the initial stage, when the operating agreement is written. 

How to Legally Establish a Limited Liability Company in the State of Delaware:

Since we have already discussed what an LLC is, its advantages and disadvantages, and why it could be preferred over other forms of businesses, let us discuss the various steps required to legally establish an LLC.

Here are the major steps you must carry out in order to legally establish an LLC.

Coming up with the perfect name for your LLC:

The first step of establishing any business, including an LLC, is to come up with an appropriate name for it. Proper care must be taken about some rules that are set to name an LLC in Delaware:

  1. Make sure that the name you come up with is not associated to any other LLCs in Delaware. You can search available names here. 
  2. The name must end with “Limited Liability Company” or “Limited Company”.
  3. If there are any words prohibited by the state of Delaware for an LLC, make sure the name you come up with does not include those words. You can find the statue here under “18-102 Name set forth in certificate.” Basically you can’t have “bank” in your name unless you are a bank. 
  4. Make sure the name selected does not violate any other company’s trademark.

Articles of Organization:

Just like a corporation writes its articles of incorporation, members of LLC have to write the articles of organization. After the name has been selected, you must head towards the Delaware LLC filing office to set up your articles of organization. In the state of Delaware, this document is called as Certificate of Formation and . This certificate must include the selected name and information of the registered agent of the LLC (name, address etc). This step is important and the filing fee of this document in Delaware is $90.

You can fax the document to: 302-739-3812

Or mail it to:

Division of Corporations

John G. Townsend Building

401 Federal Street, Suite 4

Dover, DE 19901

Make sure to include all fees with your application.

Registered Agent:

The next step you need to do to establish of an LLC legally is to appoint a registered agent (like us!). It is a requirement in Delaware that every LLC must have an agent for service of process. This agent is someone who accepts the legal papers in case of any problems on behalf of the LLC. The agent must have an address of Delaware. If you live in Delaware, you can be your own registered agent, if you don’t you need to have one. 

We’d love to be your registered agent – click here to sign up!

The Operating Agreement:

Like every corporate has bylaws by which it is governed, an LLC has an operating agreement. Though it is not a necessity in Delaware, but is highly recommended. If you decide to establish an operating agreement, you must know that this document has to be filed in the certificate of formation you designed earlier.

Fulfillment of Basic Requirements:

After all the above steps have been completed, you must comply with the tax and regulatory requirements. These requirements include:

  1. Employer Identification Number: if your LLC is not a single member LLC, each member must head to Internal Revenue Service for obtaining an Employer Identification Number (EIN). If it is a single member LLC, you must still obtain an EIN number for it, irrespective of employees. You can apply for an EIN on the IRS site here
  2. Business License: like every other business in Delaware, your LLC must also obtain a business license depending upon the nature of the business and its location.
  3. State Tax Obligations: in the state of Delaware, every LLC must pay an annual amount of $300 by 1st June of every year. This is called the Alternative Entity Tax.

Elect a tax classification

Like mentioned above, LLCs have flexibility with their tax status. But – you have to make sure you elect your tax status with the IRS (by filing IRS Form 8832). Otherwise the IRS will select a default tax status that could cost you significantly at tax time. The default tax status are “sole proprietorship – self-employed” for one person LLCs and partnership for multiple member LLCs. So if you want to take advantage of S-Corp tax status, make sure you file the paperwork!

Good luck with your LLC!

Linked Resources:

Delaware Name Search: https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx

Delaware LLC Naming Statute: http://delcode.delaware.gov/title6/c018/sc01/index.shtml

Delaware Filing Resources: http://corp.delaware.gov/newentit09.shtml

LLC Filing Paperwork: http://corp.delaware.gov/LLCFormation.pdf

IRS EIN Application: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

IRS Corp Entity Tax Type Election 8832: https://www.irs.gov/pub/irs-pdf/f8832.pdf

Types of Corporate Entities

Types of Corporate Entities: LLC, S-Corp, and C-Corp

Your business can be as small as a one man army or a corporate behemoth. Whatever it is, it starts with some intelligent decisions and a little bit of paperwork. The three prominent types of corporate entities for people starting a business with are an LLC, an S-Corp and a C-Corp. You need to incorporate your business to make it recognized as a separate entity in the eyes of the law. This is the very first ‘important decision’ you need to make.

Some of the questions that might boggle your mind are: how should you decide which corporate entity you should go for? Which business entity would work best for you? How does an LLC differ from an S-Corp or a C-Corp or vice versa? What are the basic points of differentiation among the three of them?

Whether you have purchased an existing business or want to start fresh, you must first decide which business entity you should register with. Though there are various aspects in which these three business entities differ from each other. The extent of liability and tax implication involved are the leading deciding factors for each entity type. Other factors include the the ease of raising funds and the set-up cost involved and legal overhead. Making a well-thought and a well-informed business entity decision is among the best investment you can make for your business. Ensure that you analyze the advantages and disadvantages of all the three forms of business entities: LLC, S Corp or C Corp, and go with what best suit your goals.

A Detailed Look at the Three Types of Corporate Entities: LLC, S-Corp, and C-Corp

To incorporate your business as an LLC, S-Corp, and C-Corp in Delaware, you first need to file the appropriate documents with the state agency. These documents include the articles of organization for LLCs and the articles of incorporation for the corporations. Here are the details for each:

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a corporate entity that combines the characteristics of a Corporation and a Partnership/Sole Proprietorship. The members of an LLC enjoy limited liability and cannot be held for the debts of the company. In another word, business owners stand to lose only what they have invested into the business. For example, if the company is sued for any reason whatsoever, and the resulting judgement is more than what the company can afford, the members of the LLC aren’t personally liable to pay the judgement or make up the difference.

Another major characteristic of an LLC is ‘flow through taxation.’ This implies that the profits are passed on to the owners to be reported on their personal tax returns and avoids double taxation. For example, the profits of an LLC are distributed to the owners are are taxed as their individual income. However, the LLC, being an entity, is not subject to direct taxation and thus, is not taxed for the revenue earned.

LLCs offer more flexibility than a corporation and is suitable for companies having only one owner. If you are looking for creating an LLC in Delaware, it is very easy. All you need to do is file the proper Certification of Formation with the Delaware Secretary of State. About 2/3rd of all companies formed in Delaware are LLCs!

The members of the company draft the Operating Agreement which contains the structure of the company and the rules governing the members of the company. These rules can be amended if the need arises.

An LLC has a low start-up cost and offers an affordable Franchise Tax (A franchise tax is a tax charged by a state to corporations and LLC’s for the privilege of incorporating or carrying out business in that state. It, like income tax, is generally imposed annually – currently a flat fee of $300 annually as of 2014). People who want to start a company but have no intentions to go public, opt for this type of corporate entity.

An LLC might be the right type of business for you if:

  • You want a business entity that offers limited liability to its members
  • You need flexibility to share the profits between or among the owners
  • You want to go for an entity offering flow through taxation
  • You want to be flexible in preparing your accounting (LLCs don’t require the use of accrual accounting)
  • You want flexibility in the structure of the management of the business
  • You want to keep the ongoing formalities and documentation requirements to the minimum (e.g. a corp requires an EIN (Federal Tax Identification Number, annual directors meeting and notes, etc.)
  • You want to avoid the meeting requirements imposed on Corporations ‘as mandatory’ by the State.

C-Corporation

A corporation is a separate legal entity set up under the state law offering limited liability to its members. This implies that the owners cannot be held liable to the creditor’s claim – like an LLC, they can only lose up to the amount of their individual investment.

Incorporating your business entity automatically registers you as a ‘C-Corporation.’ A C-Corp is a separate tax payer, which implies that the corporation itself is taxed for its income and expenses. If owners receive the profits as dividend, they need to pay a separate tax on this dividend, leading to ‘double taxation.’ – i.e. the corporation pays taxes for it’s profit, and the individuals that get paid from the corporation also pay personal income tax.

This is why many small to medium scale business don’t opt for C-Corporations (but will do S-Corps, more on that later). Due to the flexibility it provides on the share and membership structure, large companies favor this type of business entity. A C-Corporation can have any number of members with varied levels of voting privileges among them. This helps the C-Corps grow and expand their shares easily. A C-Corp is fairly easy to form (though not as easy as an LLC) and easy to sell.

C-Corps and S-Corps are actually two different forms of the same type of Corporation, so they both have the same management and regulation compliance requirements.

A C-Corp might be the right type of business for you if:

  • You want a business entity that offers limited liability to its members
  • You want easy ability to divide ownership
  • You want relative ease of use in Delaware (Delaware has a series of tax and regulatory laws- specifically the Delaware General Corporation Law – that are more advantageous to the corporation than almost anywhere else in the country.)
  • You want to have the ability to issue stock options with different classes of stock
  • You want to be able to sell your business easily
  • You want to have tax benefits on sale (as an owner)
  • You want flexibility in sharing profit among the owners
  • You need venture capital for financing
  • You want company earnings to stay in your business so that it can grow
  • You want flexibility in fixing the salaries for owners/employees and provide substantial health and medical benefits
  • You prefer lowering the risk of IRS audit exposure (as there is a higher audit rate for business income that is reported solely on Schedule C of Form 1040 – US Individual Income Tax Return)

S-Corporation

Technically, S-Corporations are not legal business structures. An S-Crop is actually a tax election granted by the IRS – one that you have to apply for. S-Corporations are meant for small to medium scale businesses and thus, cannot have more than 100 members. The members enjoy limited liability and are only liable to the amount of their individual investment i.e. they don’t owe any personal liability to the business debt.

To create an S-Corporation, the owner must form a Delaware general (C-Corp) or close corporation (LLC) and then file Form 2553 with the IRS within 75 days of the date of formation. Once the application is approved by the IRS, the S-Corporation will need not pay the US federal income tax, but the owners/shareholders pay the taxes according to their share in the Delaware S-Corporation. So, unlike C-Corporations, S-Corporations do not pay tax. Instead, the shareholders or owners are taxed for on the amount of income/dividend they receive.

However, a Delaware S-Corporation must perform a lot of functions to ensure compliance concerning issue of stocks, passing of bylaws, holding shareholders meeting and maintaining the correct Minutes of Meeting, etc.

An S-Corp might be the right type of business for you if:

        • You are looking forward to the benefits of being a Corporation along with the advantage of the ‘pass-through taxation.’
        • You want to enjoy the flexibility of fixing the salaries for the employees/owners.
        • You want to enjoy the flexibility of maintaining accounts. Until the S-Corporations have inventory, they need not use the accrual method of maintaining accounts.
        • You are Ok with having only one single class of stocks but with different voting rights.
        • You prefer lowering the risk of IRS audit exposure (as there is a higher audit rate for business income that is reported solely on Schedule C of Form 1040 – US Individual Income Tax Return)
        • You want to receive both salary and dividends leading to a reduction in the overall tax bill.
        • If you anticipate going public in future and look for an option with ease of conversion, S-Corporation is for you. It is easy to convert an S-Corporation to a C-Corporation as compared to converitng an LLC into a C-Corporation.

C Corp, S Corp, and LLC in a Flash:

        • Liability: LLCs, C-Corps, and S-Corps offer personal liability protection. The liability is limited to your investment and your personal property is not at risk (in most cases)
        • Taxation: LLCs and S Corps both offer ‘Pass-through taxation’ while C-Corps is a ‘separate taxpayer’, leading to double taxation.
        • Business Scale: Small to medium scale businesses go for S-Corporations and LLCs while the big businesses opt for C-Corporations.
        • Ability to take public: C-Corporations can go public to raise funds. S-Corporations, when going public, become C-Corporations. LLCs can be incorporated without tax and then taken public.
        • Ability to Change Structure without Tax: The C-Corporation and S-Corporation don’t have the ability to Change Structure without Tax, but LLCs do have.
        • Flexible Charter Documents: The C-Corporation and S-Corporation need to follow strict compliance with the rules and regulations laid down by the State, while the LLCs enjoy flexibility in charter documents.

Delaware General Corporation Law provides more advantages to the Corporations than almost anywhere else in the US. This makes Delaware the most preferred destination for the companies and investors to incorporate. The State gets the revenue, and you get the ease of relaxation in taxation and regulations!