Over the years I’ve had many people ask to sit down with me to discuss what they need to do when starting a new business. I think that’s a smart thing, that is, to be proactive and plan things out, prior to starting. I’ve seen all too often what happens when people start a business, and then come to me after the fact, when the books are already FUBAR (Google this term, if you don’t already know what it means!), and taxes haven’t been paid. As with so many tax and accounting related matters, it always takes a lot longer (and costs more in CPA fees) to figure out and clean up messes, than it takes to do things correctly from the get-go. This is a very brief discussion of a few things to keep in mind when starting a business.
Form of entity
There are legal and tax implications to the decision of what type of entity to operate under (i.e. sole proprietor, partnership, LLC, corporation). I’ll leave the legal/liability discussion to the attorneys. From a tax perspective, very simply, if you’re anticipating a net income for your business, you need to think about the taxes you’re going to owe on that business. Regardless of the type of entity, the income tax needs to be paid in, in one format or another (estimates, withholdings, etc).
Every business needs to maintain some sort of accounting records, for at least two purposes; preparing a tax return, or for an audit. There must be a system to account for (and summarize) all the income and expenses of the business. The accounting records can be as simple as a worksheet (for example, in Excel), or as complex as a program containing multiple modules for such things as point-of-sale, inventory, accounts receivable, and accounts payable. For a small business, Peachtree or QuickBooks (QB) has been the software of choice. Warning; using accounting software does not turn a person into a bookkeeper. My reference to FUBAR earlier has to do with just this thing. I’ve met way too many people who are not accounting literate or aren’t really comfortable with numbers, and as a result, the QB file has practically had to be completely redone, wasting a lot of time (mine) and money (the clients). My final comment on this subject is to have a bookkeeper maintain the accounting records, if you’re not sure about doing it yourself. It’ll be one of the best investments you can make.
As a CPA, how could I not mention taxes in an article about starting a business? I already briefly mentioned this above, but wanted to say a little more about the subject. If you set up your entity as an ‘unincorporated’ business (any of the above choices, other than corporation), the taxes on your net income will be paid in via personal quarterly estimated tax payments. If you’re a “C” corporation, the corporation will pay its own estimated tax payments on the corporate net income, and you will have taxes withheld on the salary you get from the business. If the corporation pays a dividend to you, you will owe tax on that too. If you’re an “S” corporation, you’ll withhold tax on your salary, and will also owe tax on any net income that passes through to you.
This just scratches the surface of what you need to think about when starting a business. As I’ve done in other articles, I highly recommend that you assemble your team of professionals (starting with an attorney and a CPA) and map out the legal, accounting, and tax plan before you start operations. It’ll be time well spent.
What experiences (accounting or tax) have you had when starting your business? Please share with everybody else, and as always, let me know if there’s a subject you’d like to see me write about.