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Figuring out how to file your self-employment taxes can feel intimidating and time-consuming, especially with the ever-changing tax laws that can confuse even an experienced filer. \nHowever, this process doesn't have to be a headache. As the 2023 deadline quickly approaches, preparing in advance can help you avoid costly penalties and fees. That way, you can enter tax season feeling confident and stress-free.\nKeep reading to learn how to prep, calculate, pay, and file your self-employment taxes in 2023. \nWhat is self-employment tax?\nOne of the first major shocks of working for yourself is learning that you’re now responsible for additional taxes. In short, the self-employment tax is something that all self-employed individuals must pay in addition to the income tax.  The Internal Revenue Service (IRS) uses this tax to fund the Social Security and Medicare programs. If it helps, you can think of it as investing in your own retirement since those programs largely support retirees. \nThe good news is that you don’t have to pay this tax until you earn more than $400 in self-employed net income. After that, you’ll have to put aside a percentage of your earnings to ensure you can afford to pay what you owe when the time comes. \nThis process differs slightly from filing taxes with a regular job because employers pay half their employees' Medicare and Social Security taxes while self-employed workers pay the entire thing. And unlike with a regular job, there’s no employer to take these taxes out automatically, so you have to be responsible. \nAlso, remember that the self-employment tax is not the same as income tax—which you’ll also have to pay.\nWhat is the self-employment tax rate in 2023?\nThe official self-employment tax rate for 2023 is 15.3%. To break that down, 12.4% goes toward Social Security, and 2.9% funds Medicare.\nThere’s also a cut-off for paying the Social Security portion based on your overall income from net earnings, wages, and tips. Keep in mind that the cutoff increased 8.2% to $160,200 for the 2023 tax season.\nOn the other hand, Medicare taxes never cut off. If you are a single filer who earns more than $200,000 from self-employment, you might even have to apply a 0.9% additional Medicare tax. For joint files, the income limit is $250,000.\nWho pays self-employment taxes?\nSelf-employment taxes are the responsibility of all self-employed individuals. These rules apply regardless of age or whether you are on Medicare or receive Social Security benefits. You'll likely have to pay if you earned more than $400 from a self-owned business. \nHere are some specific examples of who pays self-employment taxes:\nGig workers like rideshare and delivery drivers\n\nFreelancers and independent contractors\n\nAnyone earning passive income from:\nBeing a partner in a business\nBook/digital product sales\nMusic sales\nProduct sales\nOnline marketplaces (Etsy)\nSole proprietors or anyone \nneeding an LLC\n\nReal estate investors \nAnyone earning more than $108.28 a year from church employment\nNote that if you also have a full-time job, you’ll only apply the self-employment tax to your self-employment income. Also, in-home caregivers for disabled and elderly individuals \ndo not pay self-employment taxes\n.\n\nHow to file self-employment taxes step by step\nFiling your self-employment taxes can be a daunting task, but with the correct information and a few helpful tips, you can make the process much smoother. Below, we'll walk you through the steps of filing your self-employment taxes step by step. These tips and tricks will help you easily and confidently navigate the filing process.\nStep 1: Gather your documents and relevant info\nFor a stress-free filing experience, you’ll want to have all the necessary information and documents ready to go before you do anything else. \nFirst, you’ll have to provide identification in the form of either your Social Security number or your Individual Taxpayer Identification Number (ITIN). If you pay people to work for your business—even if they’re contractors—you will need an Employer Identification Number (EIN). Otherwise, you can use your social security number. \nThe next document you need is the 1099 form. If you don’t know, a 1099 form is for reporting income that doesn’t fit traditional W-2 reporting, such as freelance work, rentals, royalties, and independent contractor payments. \nYou can also use it to report non-employee compensation to contractors and other service providers of more than $600. If you did contract work for a company during the tax year, they should send you a 1099 form before tax time.\nTip:\n Companies will likely request that you fill out a W-9 form while establishing the service contract. The purpose of that document is to collect your tax-relevant information so that the company can accurately fill out your 1099 form.\nAdditionally, you should find all ledgers or bookkeeping tools you used to record income and expenses. You’ll want to keep your expenses organized throughout the year, so finding \nproof of income\n is super easy when tax season rolls around. \nStep 2: Total up your earnings\nOnce you’ve gathered all the necessary information, it’s time to calculate your earnings. The formula for this step is:\n[Net earnings = Gross self-employment income - Business expenses]\nTo avoid mistakes, you can make these calculations using \nSchedule C (form 1040)\n if you’re filing as a sole proprietor or \nSchedule E (form 1040)\n to report passive or supplemental income.\n\nStep 3: Total up any possible tax deductions\nAs a self-employed individual, the IRS allows you to deduct certain \nbusiness expenses\n from your taxes. This can help reduce your overall tax burden and save on the extra costs of self-employment. Here’s a quick overview the deductibles you could be eligible for:\nHome office:\n Expenses involved in running your business from home.\nEducation:\n Funds you spend to gain expertise towards your business.\n“Above-the-line” deduction:\n Half of your self-employment tax is deductible from your income tax.\nQualified business income (QBI):\n Up to 20% of your net profit. \nPhone and internet costs:\n Expenses you incurred from using your phone or internet for business purposes.\nMemberships:\n Expenses related to joining professional organizations in your industry.\nAdvertising/Marketing:\n Expenses involved in marketing your business.\nStartup costs:\n The costs of getting your business up and running.\nOffice supplies:\n Any funds you spend on necessary items for your office.\nCredit card and loan interest:\n Interest you gained on credit accounts from business purchases.\nBusiness travel and meals:\n Expenses involved in traveling for work.\nCar:\n Expenses related to using your personal vehicle for business.\nBusiness insurance premiums:\n Funds you pay towards insurance if you have employees.\nHealth insurance:\n Expenses related to securing health insurance.\n\nRetirement plan\n contributions:\n Expenses involved in securing a retirement plan.\nKeep in mind that each of these \nself-employed tax deductions\n has rules and requirements you need to follow.\nIt’s also possible to avoid the self-employment tax altogether if you file your LLC as an S Corp. You’ll only have to pay on your personal salary, as opposed to all your business profits. This solution may not work in all situations, so ensure you're clear on the pros and cons of \nincorporating your business\n.\nStep 4: Figure out how much you have to pay\nTo calculate the self-employment tax, multiply your net income by the self-employment tax rate. If your net earnings from self-employment from all businesses are $400 or more, use \nSchedule SE (Form 1040)\n to calculate your tax. \nOnce you have your answer, add it to \nSchedule 2 of Form 1040, part II\n.\nTip:\n You only have to apply the self-employment tax to 92.35 percent of your net earnings, which could save you thousands of dollars in tax payments.\nHere’s how that works. When using Schedule SE, you’ll chop 7.65 percent (or half of the self-employment tax rate) off your self-employment income \nbefore you apply\n the self-employment tax. For example: If you made $55,000 in self-employment income, you would only pay self-employment taxes on $50,792.50. That keeps almost $5,000 in your pocket.\nThe formula for this calculation is:\n[Net income x .9235 = Taxable income]\n\nStep 5: Make quarterly payments\nWhile you only report and file self-employment taxes once yearly during tax season, aim to pay them throughout the year to avoid penalties or interest charges. You should also track all the tax payments you make during the year for accurate reporting.\nYou’re eligible for estimated quarterly payments if:\nYou owe a minimum of $1,000 in federal income taxes this year, even after tax credits.\nYour withholding and refundable credits don’t cover at least 90% of your tax liability for this year or 100% of last year’s liability.\nTo pay your taxes quarterly, you should first estimate your annual earnings and calculate the amount of tax you owe using the formula from earlier. Divide that total into four payments and send those to the IRS every quarter. Remember to attach your payment to the appropriate payment voucher on \nForm 1040-ES\n.\nDon’t forget that there are deadlines. These are estimated quarterly payment due dates for 2023:\nApril 18, 2023\nJune 15, 2023\nSeptember 15, 2023\nJanuary 15, 2024\nAs for payment methods, you can opt for cash or money order through the U.S. mail or \npay online\n or through the IRS2Go mobile app.\nStep 6: Filing your self-employment tax\nThe final step to filing your self-employment tax is when all the previous steps come together. In this portion, you’ll finalize the information and forms you need to send to the IRS. \nFirst, use the results from your self-employment tax calculations to fill out \nForm 1040\n. Remember that you’ll need to provide your Social Security number or ITIN.\nAttach Schedule C (or E), which you filled out earlier. Next, report the tax calculations from your Schedule SE form on part II of the \n1040 Schedule 2\n, and attach that to your 1040.\nWhen you’re ready to send these forms off, you have a few options: The free IRS e-filing service, a third-party e-filing company, or you can send the physical forms to the \nfiling office in your state\n.\n\nNow that you can confidently file your self-employment taxes, it’s important to stay organized and ready for tax season. Track and streamline all transactions for your self-employed business and keep them separate from your personal finances with the \nSolo app\n.\nSources:  \nIRS\n\n

How to file your self-employment taxes in 2023

When you \nwork for yourself\n, it may seem easier to combine your personal and business finances; you may think about dipping into your personal savings to help fund your new business venture or using your personal debit card here and there to make business transactions. While this may seem easier up front, filing taxes and managing your finances can go much smoother if you learn how to separate business and personal expenses from the start.\nFiling business taxes requires much more documentation for things like business expense write-offs, financial reports, and payroll information, so it’s important to distinguish a clear separation between the two. In this guide, we’ll teach you how to separate business and personal finances so you can stay organized and prepared for tax season. \nNOTE: We have made a reasonable effort to provide accurate information, but we are not tax attorneys or accountants. This article is for informational purposes only, and Solo does not accept any liability for the use or misuse of this information. Consult a tax professional familiar with your state's laws.\nBusiness taxes vs. personal taxes\nSimilar to personal taxes, business owners get taxed on the income they make from their business. The biggest differences between personal and business taxes are the forms you need to fill out, write-offs you can deduct, filing requirements and deadlines you must meet when filing.\nSo, what exactly are business taxes and personal taxes and what are we paying for? \nExamples of business tax:\n \nIncome tax \nEmployment tax\nSelf-employment tax \nEstimated tax\nExcise tax \nExamples of personal tax:\n \nPersonal income tax \nPayroll tax \nProperty tax \nCapital gains tax \nEstate tax \nDo you file business taxes separate from personal taxes?\n\nDetermining whether or not you can file your business and personal taxes together or separately comes down to your business structure. \nMany business structures, aside from corporations, are pass-through entities, which means business owners will file their business taxes on their personal tax returns. If you’re a pass-through entity, you’ll file an informational federal tax return but won’t be responsible for paying corporate income tax.\nEach structure has different \nfiling requirements outlined by the IRS\n.\nPartnership\nPartnerships are pass-through entities, meaning each owner must report business income and losses on their personal tax returns using \nForm 1040\n. Partnerships must first file \nForm 1065\n to report the business's financial information. From there, each owner will receive a \nSchedule K-1\n that they will use to prepare their personal tax return. \nSole proprietorship\nAs a sole proprietor, your business structure is a pass-through entity, so you cannot file business and personal taxes separately. You will use \nSchedule C, Form 1040\n to file business income and expenses on your personal tax return. \nS corporation\nS corporations are also pass-through entities, so each individual owner will pay their portion of business taxes on their personal tax return using \nForm 1120-S\n.\nC corporation\nYou can file business and personal taxes separately as a C corporation since the IRS sees it as a separate entity from its shareholders. To report your business expenses as a C corporation you must file \nForm 1120\n.\n\nLLC\n (Limited Liability Company)\nLLCs are also pass-through entities, so the owner will report business incomes and losses on their personal tax returns. However, if your LLC has multiple members, you can elect to file as a corporation to keep your business and personal taxes separate using Form 1120. \nHow to separate business and personal expenses in 7 simple steps\n\nKeeping your business and personal finances separate starts with the formation of your business. Here are seven simple steps you can take to ensure you keep your business and personal expenses separate to make the filing process during tax season a breeze. \n1. Register your business\nDetermining your business structure and registering your business is the first and most important step in maintaining separation between your business and personal finances. As mentioned above, each type of business structure—\nsole proprietorship\n, \ncorporation\n, \npartnership\n, and \nLLC\n—has different tax filing requirements. As a small business owner, you’ll likely classify a pass-through entity, so you’ll file business income and expenses on your personal income tax return.\nHowever, \nincorporating your small business\n may allow you to keep your personal and business finances separate, as it’ll be a separate legal entity. If you want to keep your business tax return and personal tax return separate, it’s best to register your business as a C corporation or LLC and elect to file as a corporation. \n2. Apply for an EIN\nAn employer identification number (EIN) also known as a Federal Tax Identification Number, is a nine-digit number issued by the IRS to identify your business for tax purposes. Think of it as a social security number for your business. Business entities operating as a corporation, LLC, or partnership must obtain an EIN. \nIf you operate as a sole proprietor, you aren’t required to obtain an EIN and can use your social security number when filing your taxes. However, you can still get one. If you plan to open a business bank account, it may be smart to get an EIN, as some banks require this when opening a business account. \nTo obtain an EIN, you can: \nApply online:\n Complete the \nonline application\n and receive your EIN immediately. \nApply by fax:\n Complete \nForm SS-4\n, fax it to the \nappropriate fax number\n, and receive your EIN within four business days. \nApply by mail:\n Complete \nForm SS-4\n, mail it to the \nappropriate address\n, and receive your EIN within four weeks. \n3. Open a business bank account\nNext, you’ll want to open a dedicated \nbusiness bank account\n. This is the easiest way to ensure you keep your business and personal finances separate. It’s best to start with a business checking account, so you can use it to pay bills and make day-to-day business transactions. \nEven if you are a sole proprietor and have to file your personal and business taxes together, a business bank account will allow you to track your business’ income and expenses separately. This will make it easier to distinguish your business income from your personal income during tax time. \nA business bank account can help build your business line of credit, gives you easier access to \nsmall business loans\n, and helps protect your personal information, since you have to use an EIN as opposed to your social security number. \nTo open a business checking account, you’ll need: \nPersonal identification, like an ID or passport\nEmployer identification number (EIN) \nBusiness details, like your business name and address \nAny supporting documents, like your business license \nMinimum opening deposit if the bank requires one \n4. Get a business cash card\nNext, you’ll want a dedicated business card to make any business transactions. This is just another way to keep your personal and business expenses separate. \nA \nbusiness debit card\n is used to spend the funds you have available in your business checking account with no interest charges, credit limit, or other requirements. You can also quickly withdraw cash from your account if you need to. \nA \nbusiness credit card\n is used to make business transactions that you can pay back later. It can also help you establish your business credit, increasing your chances of getting a business loan. However, there are more requirements, like a credit limit and interest. \nSolo’s business cash card makes it easy to spend money on your business while helping you keep track of expenses and payments all within the app. \n5. Keep track of your expenses and keep receipts\n\nStaying organized by \nkeeping track of your business expenses\n will make filing your taxes so much easier. When tax season rolls around, you won’t have to worry about digging up receipts, invoices, and bank statements at the last minute. \nBusiness expenses are any costs related to running your business. Here are a few tips for successfully tracking your expenses.  \nAutomate with accounting software\nManually tracking your business expenses can become tedious and time-consuming, especially as your business grows. Accounting software makes it easy to keep track of and organize your expenses, saving you a ton of time you’d spend manually inputting information. \nThe great thing about accounting software is that it also has other built-in tools that can give insight into how your business is doing financially, like reporting tools. \nSave and digitize your receipts\nIt’s important to keep receipts for every business transaction you make, so you have a proper log of your business purchases. Come tax time, you’ll need to reference these expenses when determining your tax deductions. \nYou can keep paper receipts and invoices in a folder, but digitizing them is a safe and easy way to ensure they’re all in the same place. The accounting software you choose will likely have a feature that allows you to scan the receipts using your phone. \nMonitor business use of personal items\nThere may be some instances where you use personal items for business use, like using your car, home office, or personal phone. In this case, make sure you’re properly tracking when you’re using them for business purposes. For example, tracking your mileage when using your car and keeping your gas receipt. \n6. Pay yourself\nYou want to avoid using your business funds for personal needs, so paying yourself a salary is necessary to maintain a clear boundary between your personal and business finances. \nJust as you’d get a paycheck from an employer, pay yourself a salary twice a month (or on a schedule that works for you). Transfer the funds from your business account to your personal account, or set up an automatic transfer on the same day each month, so you don’t forget. \nYou may be wondering, how much should I pay myself? Here are a few things to consider: \nWhat is your monthly net income?\n This will help you understand how much profit your business generated after you’ve subtracted your business expenses. \nDo you have enough money set aside for taxes?\n A good rule of thumb is to set aside 30% of your net income to go toward paying your business taxes. \nHow much do you need to cover personal expenses?\n This will give you a realistic estimate of how much money you’ll need to pay yourself to cover your bills and other personal expenses. \nWhat is a reasonable monthly salary that won’t put my business finances at risk?\n Based on your monthly net income, tax savings, and personal expenses, determine how much you can comfortably afford to pay yourself. \n7. Prep for tax season year-round\nThe final step in keeping your business and personal finances separate is filing your taxes, which should be easy if you’ve followed the steps above. Preparing for tax season all year will set you up for success come time to file. This means setting aside a portion of your earnings for taxes. \nWhen running your own business, you may be required to file taxes quarterly and annually. \nQuarterly taxes:\n On a quarterly basis, the IRS requires small business owners to pay \nestimated tax\n if they expect to owe $1,000 or more in taxes or $500 or more for corporations. \nForm 1040-ES\n includes a worksheet that can help you determine your estimated tax. \nAnnual taxes:\n You will still need to file your annual federal income tax return at the end of the year. If you didn’t pay enough in your quarterly estimated tax payments, you will have to pay the remaining balance after you file your tax return. If you paid too much, you could receive a refund. \nPaying quarterly taxes may seem like a drag, but you might find it easier to pay smaller installments than having to fork over a bigger lump sum at the end of the year. Make sure you’re staying ahead of filing deadlines for quarterly taxes to avoid penalization. \nHow to separate business and personal taxes\nLearning how to separate your business from your personal expenses helps make tax filing easy. Now that we understand how to keep business expenses separate, here’s how to separate business and personal taxes so you’re prepared to file.\n1. Organize and gather what you need to file your taxes separately\nWhen you work for yourself, you’ll need to gather a few more documents and additional information than you would need when filing your personal tax return. If you’ve stayed on top of your business finances throughout the year, accessing this information should be no problem. \nBusiness tax documents needed\nHere are some things you may need to gather when filing business taxes: \nSocial security number or EIN \nLast years tax return \nInvoices and receipts \nBills \nSales records \nBank statements \nCredit card statements \nRecord of deductible expenses you plan to claim \n\nProof of income\n\nBalance sheet \nIncome statement \nCash flow statement\nBusiness loan records, including accrued interest and payments \nThe appropriate tax forms for your business structure \nPayroll information (if you have employees)\nPersonal tax documents you need\nWhen filing your personal income tax return, here are some documents you may want to gather ahead of time: \nSocial security number \nLast years tax return \nIncome statements (W-2’s, 1099 forms) \nDependent information \nMortgage interest statement \nStudent loan interest statement \nCharitable contributions \nIRA contributions \nEducation expenses\nChildcare expenses \nMedical expenses \nHealth insurance \n2. Know the common tax deductions\nTax deductions, or tax write-offs, are business expenses that you can subtract from your taxable income to lower the amount you owe when you file your tax return. Careful planning and organization of your business finances can help you accurately calculate your yearly tax write-offs. \nCommon business tax deductions\nHere are some common \ntax deductions\n you should keep in mind before you file your business tax return: \nDeduction\nWhat’s eligible?\nPercentage deductible\nHome office expenses\nUtilities, rent or mortgage, phone bills, internet bills, etc.\nAmount based on how much you used for business\nAdvertising and marketing expenses\nBusiness cards, social media ads, flyers, etc.\n100%\nSelf-employment tax\nSocial security and Medicare taxes\n50% of what you pay in self-employment taxes\nBusiness use of car\nMileage, gas, etc.\n100%\nBusiness interest\nCredit card interest, investment interest, property interest, etc.\n30% of your adjusted taxable income\nTravel expenses\nCost of plane tickets, rental car, hotel, meals, etc.\n100%\nStartup costs\nSupplies, licensing or permits, insurance, advertising, etc.\nUp to $5,000\nEducational expenses\nBooks, tuition, supplies, etc.\n100%\nInventory expenses\nCost of products, labor costs, storage costs, etc.\n\nInsurance\nHealth insurance, business continuation insurance, property insurance, etc.\n100%\nOffice supplies and expenses\nFurniture, printers, computers, etc.\n100%\nBusiness bad debt\nBusiness loan guarantees, loans to suppliers, etc.\n100% (for fully worthless debt)\nCommon personal tax deductions\nWhen it comes to personal taxes, there aren’t as many write-offs to deduct from your taxable income. Generally, people take the standard deduction—an automated deduction taken from your taxable income. The standard deduction varies depending on your filing status, whether you’re 65 or older, and whether another person claims you as a dependent. \nHowever, if you paid property taxes or student loan interest, for example, those qualify as deductions and are considered eligible for write-offs. In this case, you can choose to itemize your deductions as opposed to taking the standard deduction. \nHere are some common personal tax deductions you should consider ahead of filing: \nStudent loan interest\nHealth care premiums \nRetirement contributions \nMortgage interest \nProperty taxes\nCharitable contributions\nNote: Ensure you only report tax deductions once\nTo make sure you don’t accidentally report your personal tax deductions on your business tax return (and vice versa) you’ll want to make sure you have all of the proper documentation separated, so you only file the write-offs once. This is why staying organized during the year is important—it makes tax filing easier and limits small mistakes.\nThough pass-through entities file their business income and losses on their personal tax returns, you’ll still want to keep business and personal write-off documentation separate to ensure you’re filing an accurate tax return. \n3. Stay on top of filing deadlines and other tax dates\nThough some business structures have the same filing deadline as your personal tax return, some have an earlier deadline. You’ll also want to make a note of filing deadlines for estimated taxes, as well as deadlines for filing an extension. If you owe taxes and miss your filing date, you may receive a penalty and have to pay. \nBusiness tax dates and deadlines\nHere are the tax filing deadlines and dates you need to know when filing your business taxes.  \n\nWhat’s due?\nDate\nWho does it apply to?\n2022 4th quarter estimated tax payment\nJanuary 17, 2023\nAll businesses\nDeadline to send out W-2 forms to employees\nJanuary 31, 2023\nAll businesses\nDeadline to send 1099 forms\nJanuary 31, 2023\nAll businesses\nDeadline to file yearly tax returns\nMarch 15, 2023\nPartnerships, S corporations, and multi-member LLCs\nDeadline to file an extension\nMarch 15, 2023\nPartnerships, S corporations, and multi-member LLCs\n2023 1st quarter estimated tax payment\nApril 18, 2023\nAll businesses\nDeadline to file yearly tax returns\nApril 18, 2023\nSole proprietorships, C corporations, and single-member LLCs\nDeadline to file an extension\nApril 18, 2023\nSole proprietorships, C corporations, and single-member LLCs\n2023 2nd quarter estimated tax payment\nJune 15, 2023\nAll businesses\n2023 3rd quarter estimated tax payment\nSeptember 15, 2023\nAll businesses\nDeadline to file returns with an extension\nSeptember 15, 2023\nPartnerships, S corporations, and multi-member LLCs\nDeadline to file returns with an extension\nOctober 16, 2023\nSole proprietorships, C corporations, and single-member LLCs\n2023 4th quarter estimated tax payment\nJanuary 15, 2024\nAll businesses\nPersonal tax dates and deadlines\nUnless you file an extension for your personal tax return, there’s only one important date you need to remember when filing your personal taxes—\nApril 18th, 2023\n. If the filing date lands on a weekend or holiday, you’ll have until midnight the following business day to file. \nIf you’d like to file an extension, you’ll need to submit \nForm 4868\n by April 18th, 2023, and you will have until \nOctober 16th, 2023\n to file your personal tax return. \nKeep personal and business expenses separate with Solo\nFiling taxes when you’re self-employed can be tricky, but staying organized and properly separating business and personal expenses can take some stress off your plate when tax season rolls around. \nSolo can make it easier for you to pay expenses and track your spending. Make purchases for your business from your Solo account balance with the Solo cash card. Your customers can also pay you using multiple payment methods, like Apple Pay, Google Pay, and other traditional payment methods. An all-in-one place for freelancers, sole proprietors, contractors, and small business owners to pay, get paid, and track their spending. \nLearn more at \nSolo.co\n. 

Guide to separating business and personal finances for a streamlined tax season

When you’re working with a \nfreelancer or contractor\n, it’s common for deliverables to change hands. Those deliverables likely amount to intellectual property (IP), meaning someone owns the rights to them. But the question is: Who exactly does own the rights?\nA freelancer IP agreement is designed to transfer ownership of intellectual property. Below, we’ll dig into the basics of intellectual property, how to protect your interests as an entrepreneur, and how to get started on an IP agreement with our free template.\nIMPORTANT NOTICE: Solo is not a law firm or licensed attorneys, nor do we claim to be. This blog does not provide legal advice and is for informational purposes only.  Before using any information or forms made available from this site, you should consult with an attorney to ensure that they are appropriate and adequate for your needs.  Solo does not claim that the forms made available on this site are complete or appropriate for use in all circumstance or jurisdictions and disclaims all responsibility for any outcomes from the use of any information provided on this site.\nIntellectual property agreement: Sample template\nNeed help crafting an IP agreement before your working relationship begins with a freelancer? Look no further than our free, editable intellectual property agreement template.\nClick below to get the template:\n\nDownload IP agreement template\n\nIf you’re not quite ready to dive into creating your own intellectual property agreement, continue reading to review IP itself and explore the purpose behind IP agreements.\nOverview: What is IP?\n\nIP is an acronym for intellectual property, which is an intangible or indefinite asset that a person creates. Intellectual property can come in many forms, but most commonly it’s protected by one of three identifying marks: copyrights, patents, and trademarks. You can license or transfer each of these IP rights with an intellectual property agreement.\nWhen you create something like a blog post, an illustration, or even a slogan for your first marketing campaign, you have the rights to that intellectual property—that is, unless you’re working under an IP agreement that transfers the intellectual property rights to someone else.\nWhat is an IP agreement?\nAn IP agreement, or intellectual property agreement, is a legally binding document that defines the ownership of intellectual property rights between two or more parties. This agreement can be between companies, employees and their employer, or even an employer and a freelancer they work with.\nIP agreements might also be referred to as IP transfer agreements or IP assignment agreements if they involve transferring the ownership rights of the IP.\n\nRegardless of the name, the IP agreement’s purpose is to guard the ownership rights of the intellectual property while also outlining any guidelines for other parties that will work with the IP, such as a freelancer—in this case, it’s a freelancer IP agreement.\nFreelancer IP agreement: Why you need one\nIf you’re planning to hire a freelancer to create any kind of work on behalf of your business, it’s a good idea to ensure your contract contains a freelancer IP agreement. When a freelancer creates work for a business, any assets are automatically the intellectual property of the freelancer unless a freelancer IP agreement says otherwise.\n\nWhat does that mean for you? If you don’t use an IP agreement with a freelancer, you might:\nLose\n the rights to assets created on behalf of your business, like logos, blog copy, or more\nDevalue\n your work or lose a unique edge if the freelancer ever decides to reuse the work for other purposes\nDamage\n your working relationship with the freelancer, potentially harming your \nbusiness’s reputation\n long term\nEven if you agree to allow the freelancer to retain ownership rights and you simply license their work, it can be a good idea to put the scope of that relationship in writing via an IP agreement. That way, you’re more likely to have protection in the event of a legal dispute over your right to use the intellectual property.\nTwo types of IP agreements: Pros vs. cons\nNot every freelancer IP agreement is created equal. In some instances, it could make sense for you to own the intellectual property rights to a work. Other times it might make more sense for you to simply license the IP from a freelancer without owning them outright.\nEach type of freelancer IP agreement has benefits and drawbacks for small business owners. Before drafting an agreement, it could help to talk things over with the freelancer you’re working with to decide what works beneficially for the both of you.\nBelow, take a look at a few pros and cons of exclusive and nonexclusive agreements:\n1. Exclusive agreement\nWhen you enter into an exclusive IP agreement, you own exclusive rights to the IP. Typically in this agreement, the freelancer sells those rights directly to you. No other party can own or use the IP, even at the discretion of the freelancer.\nPro:\n You have the option to sue for infringement of your intellectual property rights since you’re the sole owner.\nCon:\n Taking exclusive ownership of all IP rights involved in a project might be seen as a step too far for freelancers.\nExclusive IP rights must be written up in an agreement, so if you plan to take this approach, an intellectual property agreement is a must.\n2. Nonexclusive agreement\nIn a nonexclusive IP agreement, multiple people can own rights to the IP, each holding a nonexclusive license to use it. Stock photography is a common example of a nonexclusive IP agreement.\nPro:\n Since you’re not acquiring the IP outright, licensing the work in this way can be less expensive.\nCon:\n You don’t own the rights to the work, so others may be able to use it beyond your control.\nNonexclusive IP rights may not necessarily need to be put in writing like exclusive rights, but it’s still a good idea to put an IP agreement in place that clearly defines what you own and how you can use it.\nWhat to include in a freelancer IP agreement: Three considerations\nIf you’re thinking of working with a freelancer to develop creative work or an otherwise original creation, you should think about how you would like to use it and if you would prefer to own it.\nHere are three questions to answer when thinking about what to include in an intellectual property agreement:\n1. What specific IP is involved?\nYou should note exactly what is involved in the agreement in as much detail as possible to avoid confusion. It’s best for an IP agreement to also note what IP isn’t covered, such as any intellectual property that the freelancer previously created and already owns the rights to.\nDeclaring specifically what you are and are not claiming the rights to can help avoid questions about ownership when your working relationship with the freelancer comes to an end.\n2. How am I obtaining rights to the IP?\nIf you plan to obtain exclusive or nonexclusive rights, you should explain it in clear terms. Again, defining the terms of the agreement in as much detail as possible helps avoid the risk of confusion on either side of the agreement.\nYou must place exclusive rights in writing in the agreement or they cannot be enforced. If you and the freelancer are sharing ownership in some capacity with a form of nonexclusive rights, it’s a good idea to include those terms, too. That way, you have clear terms for the usage of your IP rights.\n3. What am I willing to compromise on?\nFreelancers create work that supports their livelihood, and they may ask for some concessions in the agreement. An agreement is always between at least two parties—you might want to talk with the freelancer and see how your thoughts about the project compare. \nFreelancing may be their \nside hustle\n, or it could be their fulltime gig, and you might build a great working relationship by allowing a freelancer to retain the rights to use your content in their portfolio or something else within limits.\nIP agreements can be good business sense\nNo matter the size of your business, an IP agreement’s purpose is to protect you and your interests. Even if you’re a \nsolopreneur\n that hires a freelancer for a one-off project, including an IP agreement in your contract can help clearly define who owns what when the project comes to a close.\nIf you decide to move forward with hiring a freelancer, Solo is the easy way to pay them and keep track of your spending. Learn more at \nSolo.co\n.

Why you need a freelancer intellectual property agreement + free template

While you don't technically need an LLC to \nstart a small business\n, LLCs offer many benefits, such as promoting business growth, boosting brand credibility, and protecting your assets. LLCs offer the same liability protections as corporations but have a less strict structure and fewer administrative requirements. Plus, filing an LLC is very affordable. \nMost experts recommend that anyone wanting to start a side-hustle, gig work, or microbusiness start by creating an LLC.\nWith this guide, you’ll learn about what an LLC is, an in-depth look at the benefits, how to form an LLC and alternatives to consider. \nOverview: What is an LLC?\nAn LLC, or limited liability company, is a business structure that is set in place to protect owners from personal responsibility for their liabilities or debts. An LLC structure can have a single owner or multiple. If an LLC has multiple owners, they’re officially referred to as “members.” \nMembers can mean both individuals or other businesses, as they can also own additional LLCs. Once an LLC structure is established, the assets of the members are protected from creditors related to the business. \nWhat LLCs can do \nThere are many positive implications of an LLC business structure. Below are some advantages of an LLC: \nLiability protection:\n LLCs can protect you from personal liability, meaning you’ll be protected from your employees’ or co-owners’ actions (if you have any). \nProvides structure:\n LLCs give you more structure for operating a business, such as dealing with departing or new owners, making decisions, and dividing losses and profits. \nOffers taxation options: \nMany times, LLCs are taxed as a partnership or sole proprietorship, but you can also opt for C corporation or S corporation taxation.  \nWhat LLCs can’t do\nAlthough there are a lot of pros of LLCs, there are a few elements that LLCs cannot provide. This includes:  \nIssuing stock:\n LLCs cannot issue stock like a corporation can. \nProfessions are limited:\n Depending on the state, if you are a licensed professional, like an accountant, lawyer or doctor, you will not be able to form an LLC because of the potential of making biased decisions.   \nYou can still be sued:\n You are still personally liable if your business is sued for your own wrongdoing or negligence. Additionally, assets are not protected if you personally guarantee a loan or contract. \nBenefits of an LLC \n\n
There are many benefits to filing as an LLC, such as boosted protections, tax benefits, credibility and overall business growth. Explore the advantages further below.\nMakes your business look more official  \nStructuring your business as an LLC helps gain credibility with customers and investors. When they see “LLC” in your business title, it reads as more official and can help earn trust compared to a business structure such as a sole proprietorship. This is especially helpful if you need to take out loans, finance payments or \nboost your marketing\n efforts. \nProvides liability protection\nLLCs are known as a business structure that provides liability protection. This means that assets that are personal to you (e.g., your bank account, house or car) are all protected if something happens to your business, such as a lawsuit or debt issues. \nOffers tax benefits \nWhen a business files as an LLC, it becomes a pass-through entity. A pass-through entity sends all of its profits directly to the members without having to be taxed by the government. Alternatively, the members of the business will pay a tax on the profits within their individual federal income tax returns. \nThis makes it much easier to file taxes than if you were to be taxed as a corporate entity. If a situation arises where your business loses some money, then the other members involved can help buffer the loss while filing tax return documents. \nHelps grow your business  \nSince an LLC has tax benefits and protections, it allows you the flexibility to make riskier decisions, thus providing added growth opportunities. The overall informal nature of the structure also makes the decision-making process simpler when it comes to day-to-day operations. \nLLC alternatives \nLLCs are not the end-all for business structures — you can also choose to file as a sole proprietorship, a partnership, or a corporation. Continue reading for a breakdown of each type. \nSole proprietorship\nA sole proprietorship is a business structure that is more informal. Sole proprietorships are not attached to a corporation or additional business owners. What this means is that you essentially \nwork for yourself\n, and all of the earnings go to the owner versus any partners or shareholders. \nAs the owner, you are, however, responsible for any financial liability if anything goes wrong, such as damages or employee issues. \nBest for: \nBusiness owners who plan to start a one-person operation and don’t plan on needing additional employees. \nPartnership  \nPartnerships operate much like a sole proprietorship and are just as informal, but you are splitting the profits of your business with multiple partners, or owners. With this type of structure, you don’t have liability protection.\nBest for: \nBusiness owners who want to run operations and make decisions alongside a friend, family member or business partner and are OK with sharing the profits. \nLimited partnership  \nA limited partnership is the same as a general partnership, though in this case, limited partners are “silent partners,” meaning they are limited to just the investment of the business and aren’t involved in everyday operations or decision-making. \nLimited partners are only liable for up to the amount of their investment. Many tax, accounting, and law firms operate using a limited partnership. \nBest for: \nBusiness owners who prefer the firm liability protections of corporations, but want earrings to pass through additional owners as income on personal tax returns. \nCorporation \nCorporations are a business structure that ensures your company is a separate legal entity that’s owned by shareholders. Corporations have more formalized regulations than LLCs. There are two subtypes of corporations: \nC corporation:\n This is a legal structure for a corporation in which the shareholders or owners are taxed separately from the entity.\nS corporation:\n This is a type of business structure that has elected to pass its corporate losses, income, deductions, and credits to its shareholders to put on their tax forms.\nBest for: \nBusiness owners who run a company that is further along in its growth and has more moving parts than a start-up, and will therefore typically require more liability protections. \nIs an LLC right for you? \nIf you’re wondering if an LLC is right for you, use this flowchart to help you navigate the important questions to consider before setting up an LLC. \n\nHow to form an LLC in 7 steps\n\nFiling your business as an LLC doesn’t have to be intimidating. Be sure to check with your state for additional information on specific requirements needed to file. In the meantime, follow the seven steps below to assist you in forming your LLC: \n1. Pick a business name  \nThe first step in the LLC formation process is to register your name. You’ll want to check with your state to review the name registration requirements. Be sure to also check with the county clerk’s offices and the secretary of state’s website to ensure the name you want to choose is available. \n2. Select a registered agent \nNext is to designate a registered agent to help you officiate the LLC process. Most states will require your registered agent’s name and address on the necessary paperwork. Registered agents are individuals or business entities — they can be a professional services, a colleague, or yourself if you meet your state’s requirements. \n3. File articles of organization  \nArticles of organization are paperwork that officiates your business within the state it’s registered in. Specific requirements vary between each state, so make sure to check before filing. However, there are basic requirements that are the same in every state, including: \nBusiness name\nType of business\nBusiness structure type \n4. Pay all required fees  \nDepending on the state, the cost of filing an LLC ranges from $40-$500. The cheapest states to file an LLC include: \nKentucky: $40\nArkansas: $45\nArizona: $50\nMississippi: $50\nThe more expensive states on the spectrum include: \nMassachusetts: $500\nNevada: $425\nTennessee: $300\nTexas: $300\n5. Publish a notice of intent  \nSome states will require you to publish a notice of intent. This is a document stating the intent of a party to start an LLC. Most of the time, this is a legal notice that is published as an announcement in the local newspaper of where you’ve filed your LLC. \nKeep in mind that if this is a requirement in your state, it could delay the process and cause issues if you need to launch your LLC quickly. \n6. Draft an LLC operating agreement  \nTo avoid any conflicts down the road, you’ll need to draft an LLC operating agreement. An operating agreement states the responsibilities and rights of each owner of an LLC. This agreement is similar to partnership agreements and corporate bylaws, which provide a structure to better deal with the transfer of ownership between old and new partners or any other conflicts. \nOther elements that are covered in the operating agreement include: \nOwner’s responsibilities and rights\nVoting power\nPercentage of interests in the business \nDivision of profits and losses \nScheduling of owner’s meetings \nSome operating agreements may often include a breakdown of management duties between multiple owners of an LLC. The more detailed the document, the better — it can help serve as protection if there’s ever a disagreement between you and the other owners. \n7. Open a business checking account  \nOnce your LLC is established,  open a business checking account and \nbusiness credit card\n. It’s beneficial to have an account that’s separate from your personal account because it \nkeeps expenses organized\n and makes things easier to file once tax season rolls around. \nThis also helps avoid any potential risks to your personal assets if a lawsuit against your business were to take place.  \nBoost your growth and form an LLC \nForming an LLC may seem overwhelming, but the benefits of this structure outweigh the potential roadblocks you may face when filing. With these steps and tips, you’ll be better prepared to form an LLC. \nSolo makes it easy to pay, get paid, and track spending\nSolo is not a bank, but is a financial super-app for small businesses, freelancers, sole proprietors, contractors, and more. Solo is the easy way to pay, get paid, and keep track of your spending. Your customers don't have to sign up to pay you, and can use several payment methods, including Apple Pay, Google Pay, and cards. QR codes make it easy to get paid, and you can easily cash out your Solo account balance for free, or spend it using your Solo Cash Card anywhere Visa is accepted. Learn more at \nSolo.co\n.

Do I need an LLC? When and why you should form one

In this article:\nSole proprietorship vs. incorporation\nTypes of incorporations\nHow to incorporate your small business\nWhen you first start your business, a sole proprietorship makes sense, especially if you are your only employee. But at what point should you take the next step to incorporate your business?\n \nAs your business starts to grow, there are several advantages that incorporating can offer you. There’s definitely a lot to think about as you’re considering taking that next step with your business, so we’ve provided a great starting point for your research with this article. \nSole proprietorship vs. corporation\nFirst, let’s define sole proprietorship versus corporation. \nA sole proprietorship is a business that is owned and run by one person. In this type of enterprise, the business and the owner have no legal distinction and are essentially the same entity. \nAn incorporated business (a corporation) is a company that is formally recognized as a separate entity in the eyes of the law. Once incorporated, the business is its own legal structure separate from the individual/s who started it.\nAdvantages of a sole proprietorship\nAs you are starting your business, keeping it simple as a sole proprietorship can make a lot of sense. Some of the advantages of this include:\nYou don’t have to file separate business taxes\nYou have less paperwork because you aren’t required to separate financial statements for your business and yourself\nYou get to keep all of your profits because you are the sole owner\nAdvantages of incorporating your small business\nWhen you decide to incorporate your business, you are turning it into a legally separate entity. The business and the owner are no longer one and the same. \nBecause of this, some things may become a little more complicated, like taxes and financial records. But it provides several advantages that being a sole proprietor doesn’t offer. \nYou can protect your personal assets from lawsuits and bankruptcies because your business and you are separate entities\nEstablishing your business as a corporation gives your business more credibility with customers, vendors, and employees\nAn incorporated business has the potential for better longevity. If you pass away as a sole proprietor, the business goes away with you, but an incorporated business can be passed along to another owner and the business can continue\nBetter chance of securing a business loan \nTypes of corporations\nAs you are considering incorporating your business, it’s important to learn the types of corporations, the advantages of each, and the purposes they serve. \nIn simple terms, the main differences between each type of corporation are the ways that taxes are handled.\nfile tabs with LLC S corp C corp for how to incorporate small business\n\nLLC\nLLC is a \nlimited liability company. \nLimited liability means that the owners of the company are not personally responsible for any debts or lawsuits that the business may incur. LLC members (another term for the owners) don’t have to put their personal assets on the line to cover lawsuit settlements. \nThat being said, there are some similarities between an LLC and a sole proprietorship to keep in mind. An LLC is kind of a stage in between a sole proprietorship and a full corporation. It combines some elements of both types of business structures.\nTaxes are one such thing in an LLC that are more similar to the structure of a sole proprietorship. The LLC doesn’t pay its own income taxes; the owners list their business profits and losses on their personal tax returns. \nWith an LLC, you can choose to tax your business as a corporation, but there are some additional tax laws and filing requirements to consider (learn more under the S corporation section below). \nThere are some distinct differences between an LLC and a corporation that you should consider before deciding which direction to take:\nIt only takes one business owner to form an LLC; you don’t need to have multiple members to get started\nIf you run a business in the banking, trust, or insurance industry, you can’t form an LLC\nSome states prohibit additional types of businesses from forming an LLC, so learn what your state requirements are before pursuing this option\nC corporation\nA C corporation is owned by shareholders of the company and, as such, its profits are taxed differently from any other type of corporation. A C corporation is required to elect a board of directors to oversee policies and make business decisions for the company.\nMajor advantages that a C corporation has over other types of corporations:\nC corporations usually have a lower risk of being audited\nYou can deduct the cost of benefits as a business expense (for example, you can write off the costs of health plans for your employees)\nThe corporation’s profits are taxed, and then the profits can be split among the owners (usually saving money on taxes for the individual owners)\nC corporations can have an unlimited number of stockholders\nForeign nationals can invest in C corporations\nS corporation\nAn S corporation is not a type of business entity like an LLC or C corp. Rather, it is a way to designate how your business will be handling its taxes. The IRS only classifies businesses as one of the following when it comes to taxes:\nSole proprietorship\nPartnership\nC corporation\nS corporation\n“LLC” is not an option when determining how to handle your business taxes because in an LLC you have to choose whether to file taxes as a sole proprietorship, partnership, or corporation. \nThat’s where S corporation comes in. This is the designation you can choose on your taxes for your LLC business if you want to be taxed as a corporation. \nThe main difference between taxing your business as a sole proprietor and an S corp is the way Medicare and Social Security taxes are handled. Sometimes, LLC owners can save money here by choosing to file as an S corp. \nAdvantages to taxing your business as an S corp:\nThe owner reports an individual salary which counts as an expense for the business on tax returns\nMedicare and social security taxes are only paid from each individual’s salary, not all business profits\nincome tax documents return for S corp for how to incorporate small business\n\nHow to incorporate your small business\nYou might already have a pretty good idea of which type of corporation will work best for your business. But no matter which way you choose to file, the following steps are important as you start the process of incorporating your business. \nConsult an attorney\nFirst, find a good attorney. Unless you are an expert business lawyer yourself, it’s likely that you’ll miss some things along the way, so protect yourself by consulting an attorney to help you hit all the right steps. \nAn attorney will be familiar with compliance, local licensing and zoning laws, and the proper paperwork for filing your incorporation. \nDetermine which type of corporation is right for you\nDo your research on the purposes and advantages of each type of corporation. Which is the best for your business?\nAre you a solo business owner and just want to keep your business and personal assets separate? Then an LLC could be a good route for you to take to protect yourself as an individual from any lawsuits that may come up related to your business. \nOr, maybe you have multiple owners, several employees, and/or a number of people interested in becoming shareholders. Then a C corporation might make more sense for you. \nTalk to your attorney about the tax implications of each type of corporation that you are considering and use that to help you decide which way to file your business. \nFind a business name\nWhen you file your business as a corporation, you need to have a unique business name. You won’t be allowed to choose a name that is already in use in your area because that will confuse consumers.\nSo, come up with several different options for a business name. Most secretary of state offices even have an online business name search where you can see which names are already registered. Use these resources to help you come up with something unique. \nName a registered agent\nA registered agent is someone that can accept mail on behalf of your company. When your business becomes a corporation, you are required to have a registered agent. This can be the owner of the company, your business attorney, or another director or employee within your company so long as they reside in the same state as your business. \nThere are even online services that you can pay to act as your registered agent. \nWrite articles of incorporation\nEvery corporation has to write their “articles of incorporation.” This is typically a one to two-page document that includes the following information:\nExplanation of your corporation’s purpose\nYour business’s name and address\nNames and addresses of each member of your board of directors\nNames and addresses of each officer of the corporation\nThe duration of your corporation (usually forever)\nYour attorney should be familiar with this process and can help you draft up your articles of incorporation. There are also online legal sites that offer assistance with this for a small fee. \nFile articles of incorporation with your state\nOnce you have your articles of incorporation written, you need to file them with your state. There is a fee associated with this—usually anywhere between $100 and $500 depending on your state—so be prepared for that. \nThis document should be filed with your secretary of state, and you can usually do this through their website. Find your secretary of state’s website and follow their instructions for filling your articles of incorporation. \nObtain business permits and licenses\nAfter your business is registered with the state, you need to obtain any and all business licenses and permits that are required for your particular business type (if you don’t already have these). Your attorney can help you determine what you need here. \nOpen a bank account for your business\nNow that your business is a separate entity for you as an individual, you need to open a separate business bank account. This will help you keep accurate records of your business’s finances. \nAll of the steps leading up to this point should be sufficient for an LLC. If you are choosing to establish a C corporation, continue with the next three steps. \nWrite your corporate bylaws\nCorporate bylaws lay out how your corporation is to be structured. They should have information about your shares, voting rights, how to replace board members, and other such details. \nTypes of information that you might include in your bylaws:\nTypes of shares that can be issued by the corporation\nInformation about shareholder and board meetings\nHow loans, contracts, and other transactions will be approved by the corporation\nProcedures for financial audits and how often they should occur\nInformation about the fiscal year\nProcedures for amending corporate bylaws\nYour corporate bylaws help keep structure within the business and are typically much more detailed than your articles of incorporation. These will help board members and shareholders stay accountable to the business. \nKeep a book of corporate records\nAs you incorporate your business, you should start keeping a “book” of corporate records. This is a record of all relevant documents for your corporation. This doesn’t need to be a physical book, but can (and probably should) be kept in your digital records for ease of access. \nItems to keep in your corporate records:\nArticles of incorporation\nCorporate bylaws\nMinutes of shareholder and board meetings\nAll stock transactions\nAnnual reports\nBusiness loan documents\nAny contracts the business enters into\nCommercial real estate transactions\nHold a board meeting\nOnce you have all of your records in place and have registered your corporation with your state, you are almost there! The last step is to hold your first board meeting to make everything official. \nAgenda for this first board meeting should include the following:\nBoard member formally adopt the bylaws and articles of incorporation\nA corporate seal is decided on\nIssue shares of stocks to initial shareholders\nElect your CEO, CFO, and other officers\nKeep a record of the minutes of this board meeting and all future board meetings. \nComplete any other state and federal requirements\nNo matter which type of corporation you are filing as, be sure you complete all state and federal requirements that apply to your business. Discuss these with your attorney. \nOnce this is done, your business is officially incorporated! This whole process can be completed within weeks if you enlist the right attorney and do your initial research to understand how everything works. 

How and when to incorporate your small business

In this article:\nWhen to start thinking about a business ownership transition/exit strategy\nWhat’s the best type of exit strategy?\nHow can business structure affect your exit strategy\nHow to make a change in business ownership\nTransferring your business to a new owner, or even closing it outright, can be a lengthy process. This can take even longer if you are passing the business on to an employee or family member who needs to be groomed and trained to run the business before you leave. \nThere’s a lot to think about and it’s good to be prepared \nwell\n \nbefore\n you intend to step down. \nWhen should you start thinking about your business succession or exit strategy?\nFrom the day you start a new business or become the majority shareholder of your company, you should have an idea of how you intend to implement your exit strategy. It doesn’t have to be all planned out from day one, but you should have some idea in mind of what you intend to do when you leave or sell your business. \nWill you sell the business outright? Pass it on to a family member or employee? How will you leave the business for the next owner? Will there \nbe\n a next owner?\nYou don’t need all of the specific details laid out from the beginning, and it’s okay if your plans change as you go along. But it’s important to prepare for your future and to have an idea of when you want to retire or leave the business so you can start planning this important transition. \nYou should start getting things in motion for your plan of exit well before you leave the business— we’re talking at least several years ahead of time. Most exit strategies take a long time from start to finish, especially if you need to train the next owner. \nWhat is the best exit strategy for your business?\nAn exit strategy can, and should, be different for every business. This will depend on the type of business you run and its financial structure (we’ll talk about how your business structure can affect this process below). \nHere are some of the most common business exit strategies:\nAcquisition\nAcquisition, commonly referred to as “merger and acquisition,” is when another business acquires your company. They generally absorb it into their own and continue to offer your products or services as a new addition to their business. \nThis can help the new owner broaden their offerings, stand out against their competitors, or even eliminate you as a competitor. \nIf you know this avenue is something you want to move toward from the beginning, then you can craft your business to be more appealing to potentially interested parties. Just be careful not to cater your business to the needs of one specific company, because they might not be interested in acquisition (or could change their mind) and you’ll have a lot more to lose than gain. \nInitial public offering (IPO)\nIPO is the process of offering the shares of your private corporation to the public. This allows you to raise capital from public investors who believe your company will be worth something to the public. \nThis isn’t always the best strategy for truly small businesses, but for those that grow into franchises or large corporations that the general public will have interest in. And in order to use this process as an exit strategy, you’ll need to sell your individual shares. This is more common among partnerships and large corporations with multiple owners/shareholders.\nKeep in mind that this strategy can heavily impact how you run your business and should be something that you’ve thought about from the beginning. You may need to tailor large business decisions to what the analysts believe will do well if you want the opportunity to take this route. \nManagement buyout\nOffering the business for sale to your employees is a great exit strategy if you want to see your business continue for a long time. Your employees are more familiar with the business and company culture and generally already have the relationships with your customers that they need to be successful in the future. \nThere are a couple of ways you can do this. You can allow an employee (or employees) to buy your company outright, or allow them to finance the company by paying you monthly or annual increments over time. If you go for the latter, be prepared to be involved with the business for a longer period of time during the transition. You’ll obviously want to ensure its success with the new owner so that you get your payment. \nFamily succession\nYou may be interested in selling or legally transitioning the business to the next generation of your family or a younger sibling. Keeping it in the family can preserve the legacy of your business and the family name, but it isn’t without its challenges. \nWhen considering this option, it’s best to look at the people who have been brought up with an intimate understanding of the business and how it operates. You want to sell or leave your business to a family member (or members) who are determined to succeed, particularly if you plan to benefit from any shares of the business during your retirement. \nLiquidation\nIf you don’t have anyone interested in purchasing your business outright, then liquidation may be the best route. This is when you gather all your valuable business assets (like land, equipment, your building) and sell them. \nLiquidation often occurs when businesses are facing bankruptcy or other financial hardships and need the money quickly. If you aren’t facing financial challenges, it may be worth holding out for a potential buyer. \nHow business structure can affect the sale of your business \nThe structure of your company can affect how you are able to pass on the business. So this is important to keep in mind as you build your business and plan your exit strategy. \nLet’s talk about the basics of how your business structure can impact the transfer of ownership for your business:\nSole proprietorship\nIf you are a sole proprietor or the sole owner of an LLC, then you can’t technically sell the business, but only its assets. This can include the branding, customer lists, equipment, etc. \nThis is because the ownership, in this case, cannot be transferred. The current business will be dissolved and the new owner will have to register it as a new business. \nPartnerships\nIn a partnership, at least two owners share interest in the company. In order for one partner to leave, they will need to sell their interest in the company. This can be split among the remaining partners, or a new partner can be brought in if this is agreed upon by all the partners. \nThere may be more documentation required in this process, especially because most states have regulations on partnerships and you’ll have to register any change of ownership according to your state guidelines. \nLimited liability company (LLC)\nLLCs with multiple owners work similarly to partnerships when one of the owners is retiring or wants to sell their percentage of the company. The member buyout is generally laid out in the company’s operating agreement from the beginning. The remaining owners may buy out the leaving owner, in which case a new agreement would be written up and registered with the state. \nSole owners of an LLC, as we mentioned above, will need to value up assets and sell them, rather than transferring ownership. \nC corporation\nC corporations generally have multiple shareholders that own stock in the business. Ownership is based on the number of shares that each owner holds. Because a C corporation is set up this way, the owner may have the opportunity to offer their stocks to the public through an IPO or to sell their shares to the remaining owners. \nS corporation\nS corporations are similar to C corporation except for the fact that they are taxed differently and can only have up to 100 shareholders (where C corps can have an unlimited number). S corps often have bylaws that restrict who the shares can be sold to. Because of this, shares are often sold within the company rather than be opened up to the public or to another company. \nBasics in the process of making a change of business ownership\nThere’s a lot to consider when it comes to making a change of ownership for your business. You have to gather up your assets, documentation, create a sales agreement, and set a date for all of this to be done by. \nIt can quickly become an overwhelming process. We recommend seeking the assistance of an experienced business attorney to guide you along your plan of succession. \nThere are a few main steps that you’ll need to take throughout the process. Be sure not to skip any of these. (This is where an attorney can be particularly helpful.)\nNondisclosure agreement\nBefore discussing any important details of your business, how much specific assets are worth, customer details, etc., you’ll want to have a nondisclosure agreement in place that ensures your information is protected from being used by a potential buyer outside of purchasing your business. \nIndication of interest\nOnce the buyer and you have done due diligence and valued the company (or its assets), the buyer then submits an “Indication of Interest” that gives a range of value for the purchase. If you like what you see, then you can provide the buyer with more detailed information of specific contracts, customer lists, and financial agreements that you have. \nLetter of intent\nWhen the buyer has this additional information and a fuller picture of your business, they may then provide a “Letter of Intent” in which they offer a specific value for the business. This often discusses the details of the purchase, similar to a sales agreement, however, this letter is non-binding. \nPurchase agreement\nAfter the negotiation process has ensued and everyone and their attorneys have done their due diligence and are satisfied with the terms of the sale, then a purchase agreement is written up and agreed upon by all parties to guide how the purchase will play out.\nThe negotiations and steps it takes to value up your assets can take several months before a purchase agreement ever comes into the picture. And if you aren’t the sole owner and have partners to work with, the process can take even longer because of additional documentation that is involved. \nThese steps are general guidelines and it may be different if your intent is to leave your business to your children or liquidate it outright. Be sure to consult a business advisor and/or a reputable attorney to help guide you through the process.\nA key point is, whatever your plans for succession, you need to be thinking about them YEARS before it’s time to sell, liquidate, or pass on your business. Don’t wait.\nFrom the start of your business to the time when you transfer it to a new owner, it’s important to help your business have every opportunity for success so that you can make the most out of it when you leave. \nSources:\n
\nhttps://articles.bplans.com/types-of-exit-strategies/\n
\nhttps://www.valuepenguin.com/small-business/how-to-transfer-business-ownership\n
\nhttps://www.eidebailly.com/insights/exit-strategy-transition-business-new-owner\n


8 articles found in “Legal”

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Small business essentials: How to plan your exit strategy or succession

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