Saving for short-term security not to be ignored

Q: My wife and I have always made long-term investments part of our portfolio. After all, we want to be prepared for retirement. However, what about short- term security. How do we cater for that?

A: You probably know that you need to save for retirement by making long-term investments. But too few people focus on another critical need; short-term savings. Ignore short-term savings and you may end up wiped out, perhaps even in bankruptcy. You need short-term savings to protect you against financial emergencies and to pay for predictable expenses, such as vacations, new cars and weddings.

You have two choices:

• Save up and earn interest.
OR
• Borrow the money and pay interest (at a much higher rate).

How much money do you need in short-term emergency savings? It depends on your situation. Generally, aim to have at least three to six months of living expenses in an emergency fund. Beyond your emergency fund, any funds you’ll need within three to five years should not be at risk in the stock market. Stocks can be terrific for long investment periods, but in the short run, anything can happen. Short-term savings belong in instruments such as money market accounts, certificates of deposit (CDs), short- to mid-term government and corporate bonds and mutual funds. Businesses can be formed in variety of ways.

Q: My friends and I think we’re computer geniuses, but maybe we’re really just techno-geeks. Whatever we are, we want to start an Internet consulting business and also develop and sell specialised software for the health care industry. Our question is simple. What business form should we use for our new venture?

A: You guys are probably geniuses, because you not only asked two questions that look like one, but truth be told, what you asked is rather profound. It highlights a common problem faced by young entrepreneurs, who are so impatient to start their businesses they often fail to appreciate the legal consequences of the business forms they choose to use. Here is a summary listing of the main types of business organisations with their advantages and disadvantages:

• Sole proprietorship — Simplest way to do business; no formalities to start except fictitious name filing and occupational licensing; single layer taxation; duration limited to owner’s lifetime; raising capital limited by owner’s assets and credit; owner has full management and control and receives all profits, but has unlimited personal liability for debts and claims.

• General partnership — Two or more parties associate, sharing control and profits. No written formalities or state registration required; single layer taxation; duration limited to partners’ lifetimes; can raise more capital than sole proprietorship, but still limited by partner’s assets and credit; unlimited personal liability of partners after partnership assets are used to pay creditors.

• Limited Liability Company, Limited Liability Partnership —  Usual corporate formalities of meetings and minutes not necessary; single layer taxation; raising outside capital may be difficult due to lender unfamiliarity; all members may be involved in daily management and still have liability limited to invested capital, but managing members are still personally liable for their negligence.

• Corporation — Largest dollar volume of all business forms. Written agreement and registration required, if defectively formed it’s a general partnership; considered a legal person, with perpetual existence self-incorporation by one stockholder-owner, or multiple stockholders allowed; shareholders usually have limited liability; shareholders elect directors/officers to manage business and can attract most capital by borrowing and selling. In all commercial involvements, using a business form that limits your liability only to the amount you invest is essential. The corporate form is usually the best, so long as you correctly follow required formation procedures and observe the corporate formalities.  properly capitalise the venture, and otherwise conduct business so as not to hinder or defraud creditors.