When you have a brilliant idea for a service or product, you may consider starting a business that will bring your ideas to life. Starting a business can be equally as exciting as it is overwhelming. While you focus on the latest innovations, it is important to properly account for all the transactions necessary to run your company. Proper accounting not only makes taxes less painful but also provides legal protection and valuable insight as the business grows. In the early stages of your business, concentrating on four areas will create a solid foundation to build your business.
Choose the entity type
The business should be established as a separate entity to protect yourself from liability. How your company is classified determines a lot from both legal and tax perspectives. There are three structure options that are considered pass-thru entities. These structures allow the net business income to “pass thru” to your personal return where it is taxed at personal tax rates.
|Single member limited liability company (LLC)
· The company must be comprised of only one owner (the member)
· Requires a schedule C to be filed with the personal tax return
· The net business income is subject to self-employment tax
|LLC filing as a partnership
· The company must have at least two members
· Requires a separate partnership tax return
· The net business income is subject to self-employment tax
· May have one or more members
· Requires filing a separate an S-corporation tax return
· The net business income of the company will NOT be subject to self-employment tax
· All shareholders must be paid a reasonable amount via payroll
· An election must be made for this status
Whatever structure you choose, make it official with legal documents. A lawyer can help draft these, or services on the internet can assist in establishing a partnership, limited liability company, or corporation.
Keep copies of the signed documents used to form the company. Such items would include bylaws, articles of incorporation, and operating agreements that may be needed depending on the entity type chosen. Any money loaned by owners of the company or others should also be tracked and made official with signed documentation. Should you have another member or shareholder in the business, make sure you have their personal information for tax filings including their name, social security number, and address. If you decide to work with subcontractors, obtain Form W-9 to track the information required by the IRS for 1099’s to be filed at year end.
After establishing the entity, check the registration requirements for doing business in your industry and state(s). Especially if you operate in the greater Washington DC area, even the newest organizations are often doing business in all three jurisdictions. Make sure to thoroughly research all the documents necessary for your business, starting with these four:
- Apply for an Employer Identification Number (EIN). This is your business’ equivalent of a social security number. The IRS will use the EIN to identify your business in tax filings.
- Register the organization with the state(s) and localities where you intend to do business.
- Check for state requirements on sales tax. Alternatively, a wholesaler may look for tax exemptions.
- Obtain necessary licenses for the industry in which your business operates. For example, most service companies will require a license to operate, while restaurants will need to be registered with the department of health. Check your state’s website for licensing and registration requirements.
- Create accounts with various employment departments if you will be running payroll.
Making the right decisions about how to handle the financial aspects of the company earlier on will alleviate stress down the road.
One important steps that can be overlooked is creating separate financial accounts. Take the time to establish a business checking account and credit card separate from your own personal accounts. This will save you time and money at tax time.
Many companies are using programs such as QuickBooks Online to track their business accounts. Such programs offer tiers of features that allow you to expand the software as your business grows. A lot of factors will play a part in deciding which accounting software is best for you. For ease of use, look for a program that offers the following:
- Real-time information that gives you an up to the minute view of your finances.
- A phone app that allows you to check your accounts on the go.
- The ability to track income and expenses by project or product.
As complicated as setting up a new business may seem, checking off all the right boxes will help you in the long run. Your accounting specialist will be able to help you understand and walk you through everything involved.
The team at Ryan & Wetmore has 30 years of experience guiding new businesses through the start-up phase to help them build successful companies. Contact us to discuss which entity structure is best for you, assist with state registrations, establish an accounting system, and to file your tax returns.
Chloe Parker, CPA, MBA, is a Manager at Ryan & Wetmore. Since joining the firm in 2011, Chloe has specialized in working with entrepreneurs to grow their businesses and accurately account for their transactions. Chloe leads the assurance team at Ryan & Wetmore and works closely with clients in the government contracting, construction, manufacturing, and professional services industries. She has obtained a Bachelor of Science in Accounting from Grove City College and a Masters of Business Administration from the University of Maryland.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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