legal form of your business determines the way the IRS and the legal system see you and your business. Your choice will have tax and liability repercussions. In most states, you have five main options: sole proprietorship, partnership (general or limited), limited liability company, C corporation, or subchapter S corporation.
A sole proprietorship is owned an operated by a single individual (or that individual and a spouse). The business is financed by that individual or by loans in the individual’s name. Profits and losses are treated as personal income. The individual is personally responsible for paying any debts and liabilities against the business with his personal assets as well as those of the business.
A partnership is a business co-owned by two or more people. In a general partnership, the partners pool their time and abilities in the day-to-day operation of the business. Any member of the partnership can conduct business as an agent of the partnership. As in the sole proprietorship, profits and losses are treated as personal income, and all partners are personally responsible for any debts and liabilities against the business. A limited partnership gives only general partners the authority to conduct business. Limited partners are not involved in the day-to-day operation of the business and are liable for debts against the partnership only to the limit of their investment. Commonly, if one partner should die, a partnership must be dissolved.
A limited liability company is similar to a partnership or sole proprietorship, but the owners are not personally liable for business debts. Profits and losses are treated as personal income.
A C corporation is a separate legal entity. In other words, a C corporation in the eyes of the law exists as a separate “individual,” independent from its owners. A corporation is formed when papers are filed, usually with the state in which the corporation operates. The owners of a corporation are known as stockholders. They receive a return on their investment in the corporation as stock dividends. The stockholders of a corporation are not personally responsible for debts and claims against the business (unless they have guaranteed something personally). Stockholders are at risk only for the amount of money they have invested. And the corporation pays its own corporate income taxes.
Although a C corporation offers business owners more legal protection than either a sole proprietorship or partnership, it is more complicated and expensive to set up. Some states require an attorney to file the articles of incorporation. And many C corporations find that an accountant is necessary to manage the tax and other financial implications of incorporation.
A Subchapter S corporation, like a C corporation, is a separate legal entity. The owners of an S corporation have the same legal protection as other corporate owners. An S corporation, however, is not taxed as a corporation. Shareholders in an S corporation report their share of the S corporation’s profits as personal income when they file their personal income tax returns. Usually, an S corporation is a simpler financial and legal entity than a C corporation.
Learn as much as you can about the business structure options available to you. Consult with your accountant. Then take your questions and decisions to your attorney. The attorney will do the legal work necessary to set up your legal business structure.
Can you set up the legal form of your business yourself? Yes. In many states, you can file the paperwork yourself without going through an attorney. If you’ve done it before, or if you know someone you trust who has done it before, you may find the process is not too difficult. If, however, you make a single mistake, that mistake can cost you a great deal of time and money. If you plan to file by yourself, consider the possibility of pulling the paperwork together on your own and then paying an attorney to look it over before you file.
The choice of legal form for your business is not necessarily a permanent decision. As the business grows and changes, you may change forms later. But the decision you make will have legal, liability, and tax consequences from the very beginning. Educate yourself and consult with your advisors before making your choice.
Put Together a Professional Business Plan
It takes time and energy to put together a successful business plan. You may look at this outline and dismiss the process as too much work. Doing so would be an unwise decision. A business plan offers five very important benefits.
Why Put Together a Business Plan?
First, a business plan charts a course for your business. Think about the process a new student embarks on when she first begins practicing your art. You, as the teacher, know the progression of skills the student will need to develop. You possess the analytical and intuitive skills you need to assess and guide her development. Now think of your business. Can you see right now, in advance, the steps it will need to go through to develop and grow? Do you know what specific things you have to do to guide and spur that growth? A business plan helps you think like a business owner, to develop the analytical and intuitive skills you need to develop a profitable school. It is the “big picture” you need to have when deciding the course of your business.
Second, you will need a business plan if you want a business loan, whether from a bank or a private lender such as a family member. You will need to persuade your investor that you know how to make your business a success. Your business plan is your most important tool in convincing lenders that you know your business, that you can make money, and that you can and will repay a loan.
Third, it provides focus anytime you need to express your goals to a professional such as an attorney or accountant. You must know where your business is going before you can get effective help in getting it there.
Fourth, it allows you to see before you start spending money whether your business ideas are likely to succeed. It’s easy to dream great dreams. It’s harder to finance those dreams. Do you know how much money it will take to keep your dream school afloat? Do you know how many students you will need to support it? Do you know where your students will come from? Do you know how you will be advertising to them? If you make specific plans and run the numbers before you start spending money, you can decide whether your dream is likely to become a reality. Furthermore, in spending time with your business plan, you’ll see if you have the skills and temperament you’ll need to run your business well. Did you hate putting together financial projections and marketing plans? Did you find yourself procrastinating when it came time to put together cash flow projections and balance sheets? Then maybe you want to be a martial arts teacher, not a martial arts business owner.
Fifth, a business plan helps you keep track of your goals and what it will take to meet those goals. How will you know you’ve “arrived” as a business if you didn’t know where you were going in the first place?
The Layer Approach
One way to put together a business plan is in layers. Especially if you’re still in the process of growing your martial arts school from scratch, you will need to compile a layer of foundational information first. You can fill in the details as you are able to do the necessary research.
The first layer is the dream stage. Go through each point and sketch a qualitative picture of what you would like to see for each point. In other words, don’t spend a lot of time thinking about the numbers at this stage. Without doing any serious research, get a rough picture of what you would like your school to look like.
The second layer is the planning stage. Do some preliminary research, and get estimates. Check out the martial arts schools in town to see what they look like and what they charge. Research your market, and decide who it is you want to teach. Investigate how much an appropriate facility will cost you, how much your monthly expenses will be. Set a tentative tuition rate and calculate your break-even point. Go through each point in the business plan, and do some research. In stage two of the process, you will say things like, “to reach my target market, children and young families, I will locate my school on the north
