An “entity” is, also, considered to be a “person” separate from the owner or owners of that entity.. Therefore, if it is other than a sole proprietorship, the type of entity needs to be made perfectly clear in all business dealings with customers, suppliers, government agencies, etc. that they KNOW they are dealing with a “person separate from the partners or officers of that entity.”

The only valid reason, in my opinion, for changing from a sole proprietorship to some other form of entity is to protect the family assets other than those assets used in the business. Unless there is a large net worth, or more than usual exposure to claims against the business, the extra accounting, tax reporting, and even taxes, rarely justify adopting a different form of entity. Contractors and manufacturing firms are among those types of businesses that very often should be separated from the personal tax return.

Other than a sole proprietorship, which is the right one? I tend to differ on this subject from most lawyers and CPAs.

Simple partnerships between two (or more) GENERAL partners are fine, but do require an expertly prepared partnership agreement that properly records how each partner will be compensated for time or investment as well as how profits/losses will be shared; and, how the partnership will be terminated. Many partnership agreements are deficient in these areas.

Limited partnerships, where one or more owner does not assume liabilities of the partnership beyond that person’s investment, require an $800 per year minimum fee to State of California. Very few of these (in my experience) are being formed now.

Limited Liability Companies have replaced partnerships in most instances. They, also, require a minimum $800 annual tax, and, also, require an additional fee based on SALES rather than PROFITS, which can be onerous to a business with a large amount of sales.

Assuming it is right to have a form other than sole proprietorship, I prefer a corporation.

All ordinary business type corporations are formed as “C” corporations. Then, if desired, can become “S” corporations by “electing to do so.”

Most practitioners are advising to form “S” corporations in which all profits and or losses are passed on to the shareholders, rather than by being taxed to the corporation. There is a minimum $800 per year tax by CA to the corporation,

Officers of a corporation are “employees” by law, and are normally paid salaries commensurate with what the corporation can afford to pay. In an “S” corporation, however, profits passed on to shareholder/officers “in excess of salary,” are not subject to Social Security taxes which amount to 15.2% of salaries. This has been abused to the point that IRS is auditing and assessing penalties against MANY “S” corporations.

I recommend that owners NOT elect “S” corporation status. A “C” corporation is a simpler form of entity. Profits in excess of salaries are taxed to the corporation. Losses can be carried forward to offset later profits. Personal tax returns can be prepared without waiting for information related to the “S” corp, and capital can be sheltered in the corporation at low tax rates (15% federal tax after CA tax of 8.8% on the first $50,000 of profit.) to be available for business expansion.

The “excuse” for not liking the “C” corp is that profits left in the business are taxed again on dissolution of the corporation. I have found this to be an illusion. Profits can be taken out in the form of salary in most instances. Taxes on dissolution have been extremely small during by 45 years of working with these entities.

This is necessarily a minimal coverage of this subject. If interested, please ask questions.

Once the corporation has been formed, a first meeting is held, By-Laws are adopted, directors and officers elected, bank accounts, are authorized, form of stock certificate adopted, etc. The amount of authorized capital has been set forth in the Articles of Incorporation. Other items will be included, possibly related to the amount and nature of capital contributions. This missive will not cover wording of “minutes;” only what “should ” take place” in starting the corporate business.

Many lawyers (hopefully not CPA’s”) just issue stock as part of forming the corporation in the total authorized amount and shares as set forth in the Articles of Incorporation. This is WRONG.

The Articles set forth the MAXIMUM capitalization of the corporation. It is wise to not issue the maximum authorized; one might wish to increase the shares outstanding at a later date for various reasons not to be covered in this limited missive.

How the corporation is to be capitalized is a subject for careful planning, and relates to what assets and or liabilities are to be CONTRIBUTED to the new corporation.

Assets contributed will be “some cash,” and usually all of the equipment used in the business before incorporation. If there is debt related to equipment, that would normally be contributed, also. Sometimes accounts receivable and accounts payable. If the business has been profitable, it might be desirable to set up “goodwill” as one of the startup assets to give a realistic value to the business on its balance sheet.

Depreciable assets can be contributed at “fair market value,” which might be more than “book value.” These assets may be worth far more than book value, and it is good accounting to have realistic values on the books in order to present a proper balance sheet to bankers, investors, and others.

If assets are contributed at more than the depreciated value for tax purposes, it is necessary to have separate depreciation schedules for taxes than for financial statements.

Because of this most owners of SMALL closely held corporations elect to use book value to keep “things simple.”

Once the total net value of ALL start up assets has been decided upon, it is THEN necessary to give thought to how this will be handled in “capitalizing” the corporation.

The simple way, if for example this total equals $35,000, is to issue, for instance, 35,000 shares valued at $1 per share. This rarely is the best way.

Once capital is put into the corporation as permanent capital, it cannot be removed, until all creditors have been paid, etc. It is there until the corporation is dissolved.

It might be better for instance, to only issue 5,000 shares of stock, and $30,000 in notes payable to shareholders with interest to be paid to the shareholders on this debt.

Further, one might want to issue the stock at a stated value of $10 per share, but only issue 35 shares, which would show issued and outstanding stock of only $3500 with “Paid in Surplus” (on the total $35,000 investment) of $31,500.

Using this method allows flexibility in taking in new investors, or for selling a part of ones shares to another party. The stated value would always be the $5 per share, but the price for either selling additional shares or selling part of your shares can vary “all over the place.” (Paid in Surplus can be either positive or negative.)

This is rather a short presentation, but the primary purpose is to alert business owners to the need to carefully consider how the capitalization will be completed BEFORE the stock is issued.

“Libertarian is NOT anarchist. It is for a MINIMUM amount of government. Insofar as FEDERAL GOVERNMENT is concerned it “pretty much means restoring the CONSTITUTION TO ITS ORIGINAL FORM,” or at least to the way it was before 1913, the year the federal income tax was put into effect. Without the income tax, and then later axed protections, primarily by Franklin D. Roosevelt, and the Warren years of the Supreme Court, the federal government would not be involved in interstate commerce, education, local residency provisions, etc. etc. etc!

I must make one comment here. I am thankful that racial equality was assisted by the Warren Court’s actions. It is just SAD that to achieve this, it was necessary to INTRUDE into States’ Rights, the excuse for all of the bad things resulting from this action.

Should this interest you, I highly recommend your becoming familiar with the REASON FOUNDATION, and REASON MAGAZINE which I have supported within the limits of my financial condition for about 30 years.

REASON advances a free society by developing, applying, and promoting libertarian principles, including individual liberty, free markets, and the rule of law.

One of its primary goals is the privatization of activities now performed by government agencies.

Not wanting to dwell on this, please look at www.reason.org on the internet, which gets about two million hits a month.

Being curious about the size of the libertarian movement, I looked up Libertarianisn.com on the internet and was gratified to find about 80 organizations listed ending in “Advocates for Self-Government,” which provided a test to show where the testee belongs in the political system. It did agree that I am a libertarian!

Related to this subject is the extremely liberal bias of our educational system. If anyone is interested in a college NOT infected by anti capitalists, I recommend George Mason University in Fairfax, VA, motto “Freedom and Learning.”

MISSION STATEMENT

• By providing a NEW SMALL BUSINESS with START UP advice that will either convince the entrepreneur not to try, or to help him/her to DO IT RIGHT!

• By providing EXISTING SMALL BUSINESSES with ADVICE and ASSISTANCE in BOOKKEEPING, INCOME TAX PREPARATION, FINANCING ARRANGEMENTS, BUDGETING and general FINANCIAL MANAGEMENT

• By assisting with the SELECTION and TRAINING of OFFICE PERSONNEL

• By being AVAILABLE ONLY AS NEEDED in order to avoid EXCESSIVE FULL TIME HELP that continues long after each problem is resolved, in short, by becoming your SMALL BUSINESS PART TIME CONTROLLER.

To provide SERVICES AS NEEDED to INDIVIDUALS and FAMILIES by providing EXPERT TAX PREPARATION for personal income tax returns.

My good friends Chuck Whitt, Gene Wright, and I, all Rotarians, all widowers, all from Fresno, have dinner together most Friday evenings, then watch a sporting event on television together. Chuck is conservative, Gene is liberal, and I am a Libertarian. We agree to disagree on many things. For instance, neither of them can see that the use of drugs should be decrimalized, a subject for a later blog, perhaps. Then Gene and I disagree on the subject of educators (not education.) Chuck is silent on this one!

We agree that dedicated educators are extremely valuable, especially teachers/professors, but when it comes to administration, I believe this is a typical bureaucracy, with the majority more interested in “perks” than the education and welfare of individual students.

I could elaborate on “what is education,” and “how do you achieve education,” but not in this blog.

Chuck was for McCain for President, Gene for Obama. Not wanting to completely disappoint either one of them, I voted for Senator Barr, the Libertarian candidate. (I didn’t think Obama needed my vote!)

Now, the good news relates partly to Obama’s election.

Reading about Paul Volcker’s selection to lead Obama’s Economic Panel, I find I might have been wrong about Jimmy Carter as President, although I have admired his conduct since leaving office. I was most upset about interest rates during his administration. It seemed he did nothing. Now I find that Paul Volcker was the man responsible for that situation, and it was being done in an effort to slow down inflation, a goal I have always supported. If Paul Volcker is a “Milton Friedman” type economist, this is very good news. Time will tell on this one!

Other appointments seem to be headed in the right direction, also.

Then this morning’s paper had a story about “The Wheels of Freedom,” a bicycle shop that adapts bicycles to fit individual disabilities, including one for a woman without hands (or at least without the use of her hands.)

Also, an article about the Season of Sharing Fund finding an apartment for a woman and her three children that were being evicted from their apartment because the landlord had defaulted on the loan on the property.

Then in the obituaries, reporting on the death of Gerald Schoenfeld who as the head of the “Shubert Organization” has been primarily responsible for the success of “theater” in New York and other cities, including plays such as The Chorus Line,” “Cats,” a personal favorite and MANY OTHERS.

We can be thankful, also, for the many great non-profit organizations, such as the Rotary Foundation, the Bill Gates Foundation, the Reason Foundation (libertarian, more in a later blog,) the Salvation Army Nature Conservancy, and locally the RotaCare (free medical care,) Grey Bears, the Second Harvest Food Bank, Cindy’s Celebration (bus and lunch for old people, many with Alzheimer’s disease,) and many others.

Velma Burns was my second grade school teacher at that school.

Aptos, CA November 12, 1968

Dear Velma and Dad,

Velma, I know you will understand, if this letter is written primarily to Dad. You must see in him the same things I do, or you wouldn’t be sharing his last few years with him as you are.

Dad, I have wanted to tell you many times just how proud of you I and all of the other “kids” are, and even more, how thankful I am to have been raised in your home!

We aren’t a very communicative bunch, and certainly it must seem we don’t fully appreciate you the way we visit you a half hour or so, and then are on our way again. We don’t have a lot to talk about it is true, and we are always pressed for time, and that part, perhaps, you can understand!

I can remember, as a boy, saying to myself, “I am never going to work myself to death the way Dad does; life is too short, and no kids are worth that sacrifice.” Perhaps, you believe we kids aren’t aware of the tremendous personal sacrifices you and Mother made for us. Well, we are aware of it!

Perhaps, also, you don’t know that you did such a tremendous job of taking care of us that I, at least, never realized that perhaps our family might have been classified as “poor” by many others. For instance, when completing high school, I didn’t even try for a college scholarship because in my mind those were for “poor” kids, and never did it enter my mind that I could have qualified under those terms.

Further, your example of how to take care of your responsibilities no matter how burdensome they might be was not wasted. In fact, it has always seemed to me that because of the way you and Mother faced your responsibilities that we kids just couldn’t let you down! And this has ever since made me keenly aware of the necessity for setting a proper example to others at all times. Further, if all people were aware of the “power of example,” and cared just a little bit about other people, most of the problems of the world would be solved. Unfortunately, not too many people are fortunate enough to have had parents of your caliber.

Fortunately, too, as I have grown older I have found there is pure joy in hard honest work, and that facing your responsibilities, although at times is extremely difficult, is in the end its own reward. There is no greater satisfaction to oneself than to know that he (or she) did the best one could under the circumstances forced upon him (or her.) Therefore, although I still wish you could have had happier work than your job at the school, I no longer feel as sorry for you as I once did!

I hope this is not just “too sentimental” for you, but I have thought this way for many years, and have expressed these thoughts to many people, but never to you, and it just seemed that you are the one that should hear it. To me, you and Mother are and were two of the world’s truly great people.

And Velma, you now fall into that same category!

NOTE; Velma, never previously married, found out that Dad had lost his driver’s license, and started hauling him around. This “rescued” him from intense sorrow, they were married, and had several happy years together.

We at MBBA were thrilled by the awards presented to George at the Aptos Chamber of Commerce Awards Ceremony on Friday night October 24, 2008.