Starting a Business: Lesson 4
Chuck Fisher, an Attorney with Grant Konvalinka & Harrison in Chattanooga ,Tennessee, discusses the topic of business legal structures.
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What are the three ways that entrepreneurs and business owners can hedge liability according to the video?CorrectIncorrect
What is the main reason for forming a limited liability entity according to the video?CorrectIncorrect
What type of business entity does the video recommend for small business owners?CorrectIncorrect
Video Lesson Topics
- Starting Out
The way most people start out a business is as a sole proprietorship or a partnership, which means they do business without any type of legal organization or structure. The income for the company is reflected on their tax return without any legal entity being involved. At some point, mainly to provide risk management, a business will decide to form legal entity for operation. The different types of these are a corporation, a limited liability company, and a limited partnership.
- Ways to Hedge Risks
There are three main ways that entrepreneurs hedge risks. They are the following:
- Forming a contract with the customer to limit liability or forms of liability.
- Having insurance to protect against 3rd party claims.
- Forming a limited liability entity.
- Tennessee Franchise and Excise Tax Exemptions
The franchise tax is on the net worth on the assets of the business. This calculates out to 25 cents per every $100 of value. The excise tax is 6.5% of net income. These taxes are significant and cause some business owners to not form a limited liability entity, in order to avoid these taxes.
- Limited Liability Companies
The LLC gives a business owner better limited liability protection than a corporation, no corporate formalities, and can elect to be taxed in different ways. The default way that an LLC is taxed is as a partnership or a disregarded entity. However, the LLC can elect to be taxed as an S Corporation or a C Corporation. Often, owners will elect the S Corporation because it allows them to be compensated as W2 employees, instead of having to pay self-employment tax.
The FONCE, Family Owned Non-Corporate Entity, exemption allows the LLC to shield passive investment income from franchise and excise tax. To qualify for this a percentage of the business has to be family owned, and a percentage of the LLC’s income has to be earned through passive investment income. You will have to apply for this exemption yearly by claiming it.
The OME, Obligated Member Entity, exemption allows the company to pay no franchise and excise tax. When receiving this exemption the owners agree to have liability for the company’s debts.
- Where to Form Your Entity?
The best place to form your entity would be Tennessee if you are regularly involved in commerce there. However, there are other locations such as Wyoming, South Dakota, and Delaware that can be helpful when starting your entity. Depending on the location, different benefits can be provided towards your entity. Wyoming provides the opportunity to achieve total amenity. South Dakota has a great tax scheme that benefits the entity. Delaware has corporate laws that bring certainty on certain issues.
Topics & Lessons
Each Below Topic Contains a Video Lesson and Helpful Downloadable Information
What Problem am I Solving and Who am I Solving it For?
The Planning Process and Planning Tools
What It Takes to Be Successful
Funding Options for Starting Your Business
The Realities of Grant Funding
Partnership and Operating Agreements
B Corp Certification
Is Starting a Business Right for You?
Analyzing Your Personal Finances Before Starting A Business
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