The word “business”
The word “business” is in our daily dialect for a long time already. Business is something we have been doing throughout our whole life without even realizing it. Starting your own business is the idea that is more popular nowadays. I have a dream of owning my own business, too. This “Law and Business” class provides me with an opportunity to understand or at least have a basic idea of what I want to do in the future. To be honest, I am even little worried about what I am going to do because during every class I find out one risk that I will be taking. So starting a business requires a risk, a huge risk. When I say risk, I mean there are some very important factors that need to be considered before deciding what kind of business you want to do. One of them is considering how personal assets are protected from liabilities of my business. Of course, it is important that you try to reduce the exposure to the liabilities (Bagley, 49). The business that I plan to create is a corporate law office which, by the way, will be sole proprietorship. Just imagine if someone
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If he or she decides to sue me, then I have an unlimited liability to suffer all the expenses. This is getting more complicated for me now because before starting or even planning to create my business, I have to stop and ask myself if I am putting enough money that I can afford all kinds of insurances. Of course, sole proprietorship is not the only form of entity I can choose from but sometimes it might be a better choice if I do not want to share my profits or losses. Tax strategies are the next very important factor that we have to consider when choosing from different forms of entities. Being sure that I do not get double layers of taxation on my earnings and that I can convert my earnings into long term capital gains which are taxed at a lower rate, some type of entities will be more favorable than the other (Bagley, 49). If I were an owner of a business, why would I want my income to be taxed two times? Of course, we all hate taxes especially we know it is going into the pocket Uncle Sam. How might we hate double taxation?
So the American freedom of enterprise gives us the opportunity to choose what we like to invest our money in. Ability to be financed and run the business efficiently is the last important point that I have to look at because if I am starting by business but I see no future of being financed, then I am a wrong guy at the wrong place (Bagley, 49). Having mentioned about limited liability, it is really significant to talk about corporations because they are very popular forms of entities right now. As we know, corporations have shareholders who are considered to be the part owners of the corporation. Shareholders have limited liability in their corporation which means that creditors come not after the shareholders but the corporate assets. Even if the corporate assets are not enough, shareholders are out of every problem. I would just love to be a shareholder of a corporation because all you do is invest and earn profit either through dividends or buying/selling your stock (Bagley, 50). There is one problem with the corporation.
You as a shareholder cannot disrespect the corporation. For instance, since I am a part owner of the corporation, I might decide along with some other shareholders to organize a fraud. Courts will never tolerate that and will come after the shareholders directly this time. Now I have to think if I want to be the shareholder or the one that issues the stock to the shareholders. Going back to how many times earnings can be taxed, we have to differentiate two groups of corporations. S corporation is the type that you do not get taxed twice. Why because the shareholders are taxed individually. This kind of corporation generally does not pay federal tax but passes the tax liability for its profits through its shareholders.
These taxes are reported in the individual tax returns of individual shareholders. On the other hand, C type of corporation is taxed twice. It has to pay federal corporate income tax on earned profits, and the dividends that are distributed to the shareholders are also subject to tax (Bagley, 53). So taxing introduces another type of risk that I have to consider. I definitely do look at dealing with corporations because I will be studying corporate law. One of the questions I have to answer is if I want to be a part of a corporation where I have to pay tax on my dividends as well as on my general earnings, or I want to be a part of one that only gets taxed once on its earnings.