Starting Your Own Business
Starting your own business is exciting and stressful at the same time! However, in effort to providing business owners all the help and service I can, I have gathered some common questions about the basics of starting your business. Below you will find common questions I have come across, been asked before or just thought it would be beneficial to share!
Q: Why are there so many different business types? What are the benefits to each?
Businesses can own property, hold bank accounts and is required to pay taxes. There are different types of business entities, each with unique benefits and limitations.
The “right” choice for you depends on you and whomever is involved with the business. We recommend for most individuals starting their first business, they will need a good advisor to help them understand the obligations regarding their business and what, as the owner, they are responsible for. When making your decision, here are good points to base it on:
The number of owners now and planned for the future.
The types of owners - are they all individuals or are they entities (such as corporations, trusts, etc.)?
Liability concerns
Federal tax implications
Registration and tax filing requirements and costs.
Paperwork and entity management considerations.
Sole Proprietorships Typically this type of business is owned by a single person or a married couple. The benefit to these businesses are that they are inexpensive to form and require no special reporting. However, the owner is personally responsible for all business debts and for federal taxes.
Limited Liability Companies (LLCs). The business has limited legal liability like a corporation, but there are fewer governance requirements such as creating Operating Agreement. Forming an LLC requires filing with the local Secretary of State. For federal taxes, LLCs are typically treated like sole proprietorships if there is one owner, or like partnerships if there is more than one owner.
General Partnerships are like sole proprietorships with more than one owner. Partners share managerial duties, profits and losses, and each is personally responsible for all business debt. Because one partner actions can result in personal liability for the others, partnerships have become less popular. For federal tax purposes, the business is required to file a partnership return.
Corporations is much more complex than the others. As with LLCs, corporations have limited legal liability. To form a corporation, you must file with the local Secretary of State and must create a governance document. Additionally, corporations also have other requirements, such as issuing stock certificates, holding annual meetings and keeping minutes, electing directors, etc. Corporation owners are called “shareholders” or “stockholders.” Working owners of corporations are employees and must have federal payroll taxes withheld and reported the same as other employees. Corporations file federal corporate tax returns with the IRS
Limited Partnerships (LPs) are not usually used very for small businesses, although they are common for real estate ownership. LPs are composed of one or more general partners and one or more limited partners. The general partners manage the entity and share fully in its profits and losses. To protect themselves from liability, general partners are often corporations or LLCs rather than individuals. Limited partners share in the profits of the business, but their losses are limited to the extent of their investment. Limited partners are usually not involved in the day-to-day operations of the entity. LLCs and corporations, creating an LP requires filing with the Local Secretary of State.
Q: Why do some people choose the sole prop at first?
Most people do this because you don’t need to technically do anything. To establish your sole prop you simply fill out a W-9 for the people who pay you with your information and a Schedule C with your 1040 and you’re done. While this type offers simplicity, in most cases it is not the tax-efficient approach.
Q: I’ve been receiving income for my consulting work, but I don’t have an LLC formed; should I establish one?
An LLC helps separate and secure the person from the business loss and liability. It’s also necessary if you wish to be treated as an S-Corp by the IRS, which will also be need for you to save you money on your taxes.
Q: What does it mean when I hear the term disregarded entity LLC means?
If you are a single-member LLC or sole prop you don’t have to file a separate tax return for your business and as such it is “disregarded” by the IRS.
Q: Does an S-Corp pay less tax versus someone who is a self-employed worker such as a sole-proprietor and schedule C?
Yes absolutely; merely by electing to file as an S-Corp you’ve cut your taxes down from being a Schedule C, and if you properly leverage the payroll and retirement benefits you see an increase in those tax savings.
Q: Can I leverage my S-Corp and still have a corporate job elsewhere?
Short answer – yes, it’s doable but very complicated. Consider it if your business is making enough money, $60k or more net income in a year outside of your W2, it may be worthwhile to look in to.
Q: Should my business be formatted state-wide?
Generally, it is advised S-Corps to domicile in the state they are located to reduce the likelihood of exposure to multiple jurisdictions.
Q: Should I open a business bank account? Can I use my personal bank account?
It is important to keep your business and personal finances separate per IRS regulations. This also helps your CPA properly identify tax-deductible business transactions and maintain proper financial statements to keep you in compliance of state and federal law.
Q: Should I open a credit card for my business?
It’s not strictly necessary for the business to have its own card in the company name; you can use a personal credit card as long as it is dedicated to business expenses 100%. However, it is recommended for complete separation of business and personal activity that a new credit card with the business name be acquired.
Q: All banks require a physical location address now as part of setting up a business bank account, hence being forced to use a residential address. Do you provide a service that can address this issue as they will flag it?
Yes we will allow our corporate address to be used as your S-Corp address if you desire; this will make all federal and state notices be mailed to our address first to be forwarded on.