I want to start a small business. What are my choices to operate the business?
Sole Proprietorship: One person who conducts business for profit. The sole owner assumes complete/unlimited personal responsibility for all liabilities and debts of the business. The income of the business is reported as part of the owner's personal income, usually on federal schedule C or Schedule E (rental properties).
General Partnership: Two or more individuals as co-owners of a for-profit business. Partnerships should operate under a written Partnership Agreement to avoid future problems, otherwise state statues provide the agreement terms. All partners have complete/unlimited personal responsibility for all liabilities and debts of the partnership business and in addition all partners are liable for their own acts as well as the acts of the other partners in conducting the business. Partnerships enjoy single taxation, filing a federal return on form 1065, reporting all partnership revenue and expenses, but no income tax is paid. Each partner receives a form K-1 from the partnership reporting his share of the partnership income or loss to be reported as part of each partner's personal income.
Corporation: A legal entity which is created by filing Articles of Incorporation with the Secretary of State. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder personal assets enjoy protection from the corporation's debts and liabilities. Federally income is taxed twice: 1) at the corporate level filing a federal return on form 1120, reporting all corporate revenue and expenses, and 2) at the shareholder level when income is distributed as a dividend and reported on the shareholder federal form 1040, schedule B.
S-Corporation: A legal entity which is created by filing Articles of Incorporation with the Secretary of State. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder’s personal assets enjoy protection from the corporation's debts and liabilities. After filing Articles of Incorporation with the Secretary of State, the corporation shareholders may elect to obtain S Corporation status for federal income tax purposes by filing federal form 2553 with the IRS by the 15th of the third month after the corporation is incorporated. The income of an S Corporation is taxed only once: at the shareholder level. To qualify for S-corporation status, the corporation may not have more than 75 people as shareholders (not other corporations or non-US citizens), the corporate annual revenues must be $5 million or less, and generally must operate a business without inventories.
Limited Liability Company: An LLC is a formal association which combines the advantage of a corporation's limited liability and the flexibility and single taxation of a general partnership. An LLC has members, rather than shareholders, who’s personal assets enjoys protection from the liabilities and debts of the LLC. Although not required by law, an LLC should operate under an Operating Agreement which is like a Partnership Agreement. If the LLC qualifies under IRS guidelines, it may be taxed only once, like a partnership, at the employee or member level, while not having the same restrictions as an S-Corporation.
What is the cost to start my business in Illinois?
Sole Proprietorship and General Partnership: Require no formal filing with the Secretary of State of Illinois, but if the business will operate under business name other than the name of the owners, the name should be checked for availability and possibly registered as an assumed name in the local counties where the business is conducted. While not required, we recommend partnerships operate under a written partnership agreement signed by all the partners.
Corporation and S-Corporation: To form a for profit business corporation, articles of incorporation must be filed with the Secretary of State of Illinois and the articles must include the following:
- the name of the corporation (which must include "Corporation," "Company," "Incorporated," "Limited," or an abbreviation thereof);
- the name of an individual or business with an address located in Illinois that will act as the registered agent.
- the number of shares of stock the corporation is authorized to issue, the proposed number of shares to be issue initially, and the consideration to be received in exchange for the initial shares issued;
- the name and address of all the incorporators;
- the original signature of the all the incorporators; and
- a $175.00 filing fee (if filed by mail) plus $100 expediting fee & a credit card service fee (if efiled) for next business day incorporation.
There is no additional cost to elect to obtain S Corporation status for federal income tax purposes by filing federal form 2553 with the IRS.
Limited Liability Company: To form an L.L.C., articles of organization must be filed with the Secretary of State of Illinois and must include the following:
- the name of the LLC (which must end with "Limited Liability Company" or" LLC");
- the period of duration of the LLC;
- the name of an individual or business with an address located in Illinois that will act as the registered agent;
- if the operating agreement vests management in a manager(s), a statement to that effect;
- the signature of at least one organizer, member or manager; and
- a $500.00 filing fee (if filed by mail) plus $100 expediting fee & a credit card service fee (if efiled) for next business day incorporation .
I just made a gift. Do I have to file a gift tax return?
A federal gift tax return must be filed if any gifts you made during the calendar year were other than:
- Gifts to your U.S. citizen spouse
- Gifts to a political organization for its own use
- Gifts to qualified charities, if no other interest has been transferred for less than adequate consideration or for other than a charitable use
- Gifts totaling $13,000 or less to any one individual, unless you and your spouse are "gift-splitting"
- Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual.
However, you may want to file a gift tax return in certain circumstances even if the rules do not require it. For example, you should consider filing whenever you sell hard-to-value assets, such as real estate or stock in a family business, to a relative. This is because the IRS can claim that transactions between family members were actually gifts in disguise. Disclosing such transactions on a gift tax return means that the IRS has only three years to challenge the value.
If you file a federal gift tax return, you must use Form 709 and file by April 15 of the year following the year in which the gift was made. Check with your state about its own rules regarding gifts, too.
What is the applicable exclusion amount?
The applicable exclusion amount effectively exempts a certain amount from the federal gift and estate tax. In other words, if you are a U.S. citizen or resident, you will be able to leave a certain amount of your property free from this tax
Here is the current table:
Generally, any portion of the applicable exclusion amount used for gift tax purposes effectively reduces the applicable exclusion amount that will be available for estate tax purposes. Note: The applicable exclusion amount is scheduled to drop to $1 million in 2013, and portability expires, unless Congress enacts further legislation.
Isn't estate planning only for the rich?
In a word, no. Estate planning allows you or anyone to implement certain tools now to ensure that your concerns and goals are fulfilled after you die. Your objective may be to simply make sure that your loved ones are provided for. Or you may have more complex goals, such as avoiding probate or reducing those dreaded estate taxes.
Estate planning can be as simple as implementing a will (the cornerstone of any estate plan) and purchasing life insurance, or as complicated as executing trusts and exploring other sophisticated tax and estate planning techniques. Therefore, estate planning is important whether you are wealthy or whether you have only a small estate. In fact, estate planning may be more important if you have a smaller estate because final expenses will have a greater impact on your estate. Wasting even a single asset may cause your loved ones to suffer from lack of financial resources.
You may also want to plan your estate if you have special circumstances such as any of the following:
- You have minor or special needs children
- Your spouse is uncomfortable with or incapable of handling financial matters
What makes up my taxable estate?
Your gross estate for federal estate tax purposes includes: All property that you own at death (e.g., real estate, investments, business interests, personal property, mortgages held by you). Property you have given away while retaining a lifetime interest in the income from the property, the use and enjoyment of the property, or the right to determine who ultimately receives the property. Gifts that don't take effect until you die. Property that you own jointly with another person except to the extent the other party contributed to the purchase price of the property. Property over which you possess a general power to appoint the property to yourself or others. Life insurance policies owned by you or in which you retained the right to change the beneficiary, cancel the policy, or make policy loans. Your one-half interest in community property. Annuities, pensions, and profit-sharing plans.
From your total gross estate, your estate may take deductions for funeral expenses, administration expenses (e.g., executor's fees, court costs, attorney's fees, appraiser's fees), certain debts and income taxes, state death taxes paid, and property left to your U.S. citizen spouse or to qualified charities.
The net amount may be subject to estate taxes, if estate taxes are imposed in the year in which you die. However, the amount of taxes payable on
your taxable estate may be reduced by the applicable exclusion amount (formerly known as the unified credit), and a credit for foreign death taxes.
What will happen if I die without a will?
Some people leave instructions about who gets what property in a legal document known as a will. If you do not have a will, you leave no legal instructions about how your property is to be distributed to your heirs.
The state then steps in and dictates how your property will be distributed. The state does this by following laws known as intestacy laws. Each of the states has adopted its own intestacy laws, so the pattern of distribution varies from state to state. However, a typical pattern may be that half of the property goes to the spouse, and the other half is split equally among the children.
The major disadvantage of this is that your property may not be distributed according to your wishes.
There are other drawbacks to this situation, as well. Instructions about other special matters, such as who will settle the estate or who will take care of minor children, are also left in a will. If you do not have a will, these matters will also be determined by the state. Although the state will do what it thinks is in the best interest of your family, its actions may not be consistent with what you would have wanted.
Do I need an attorney to prepare my will?
Legally, no. Practically speaking, yes. A will does not need to be prepared by an attorney for it to be legally effective. A will that you draft yourself, or even a preprinted will form purchased in an office supply store, will be legally effective if you are of legal age in your state (i.e., 18), are mentally competent, and execute the will properly. This means the will must be acknowledged and signed by you in front of witnesses. The required number and age of the witnesses varies from state to state, though two witnesses who are at least age 18 is typical. In addition, the witnesses should not be anyone who will benefit under your will. Some states also require that a will must be notarized to be legally effective.
However, most people feel uncomfortable with a do-it-yourself will. They generally have some questions that should be addressed by an experienced estate planning attorney. In addition, some people have more than just basic concerns or are in complex situations where drafting the will properly is vital. Legal assistance can help ensure that your intentions are clearly communicated and no questions exist at the time of your death. You should also seriously consider professional assistance if your personal situation includes concerns such as:
- You have minor children, children from a prior marriage, or a beneficiary with special needs
- You own significant assets and are concerned about minimizing estate taxes at your death
- You want to achieve certain goals, such as controlling the management and distribution of your property after your death
- You have heirs you wish to disinherit, or there is a chance your will may be contested after your death
What is a living trust?
A living trust is a popular estate planning tool that lets you (1) retain control over the trust property while you are alive, (2) avoid guardianship in case you become incapacitated and can no longer handle your own financial affairs, and (3) pass trust property outside of probate when you die. Legally, a living trust is a separate entity that you create while you are living to "own" property, such as a house, boat, jewelry, or mutual funds. The trust is revocable, which means that you can make changes to it, or even end it, at any time. For example, you may want to remove certain property from the trust or change the beneficiaries. Or you may decide not to use the trust anymore because it no longer meets your needs. A living trust gives you the flexibility to do any of these things.
However, you do pay a price for this flexibility. A living trust does not avoid estate or income taxes, nor does it protect your assets from potential creditors.
A big advantage of the living trust is that it allows a successor trustee to automatically take your place and manage the trust assets if you become incapacitated. For example, you have an accident and are in a coma for six months. Your successor trustee can take your place and manage the trust while you are unable to do so. That way, your affairs continue as usual, and you should suffer no financial setback.
In addition, assets in the living trust do not pass through your will when you die. Instead, the assets in the trust are distributed by the trustee according to the terms you establish in the trust. Also, the assets in the trust are not part of your probate estate. This may get them into the hands of your beneficiaries faster or, if you desire, provide that the assets be held until the beneficiaries meet certain criteria or attain a certain age. Finally, since the trust is not subject to probate, the terms of the trust are private.
What is the difference between a living will and a living trust?
These two very important estate planning devices are quite different from each other but serve similar purposes. A living will lets you manage your health-care decisions in case you become incapacitated. A living trust lets you manage your property in case you become incapacitated.
A living will is not actually a will at all. It is a legal document that becomes effective if you become so ill or injured that you can't make responsible health-care decisions for yourself. It lets you approve or decline certain types of medical care in advance, even if you die as a result.
A living will is allowed only in some states. If you don't live in one of those states, you may be able to accomplish the same goal using a durable power of attorney for health care, health-care proxy, or Do Not Resuscitate order.
By comparison, a living trust is just what it says. It is a revocable trust you create while you are living. You transfer property to the trust, and the trust then "owns" it. You name yourself as trustee and someone else as a successor trustee. You manage the property in the trust unless you become incapacitated (or until you die), in which case your successor trustee automatically steps in to continue managing the property for you.