Thinking of starting a new business? Congratulations and thank you from the rest of America! Small businesses are what keep our country running. I thought I’d post a few things to think about if you are starting a new business. Of course, this isn’t an exhaustive list, and I’d encourage you to take the time to speak with a lawyer and a CPA to make sure that all your ducks are in a row. The expertise is worth the cost.
Having said that, here are a few things to think about:
What type of business will it be?
There are all kinds of businesses — the most common is the sole proprietorship. This is by far the easiest and simplest business structure. When I used to tutor, I was considered a sole proprietorship. I reported my income and expenses on Schedule C of my 1040. There are other types of businesses as well — partnerships, S-corporations, LLCs, among others.
One of the positives about an LLC (Limited Liability Company) is that the owner(s) will have limited personal liability for the business debts. This type of business needs to be formally set up, usually through a lawyer’s office. In any case, if you decide to meet with a lawyer or a CPA, this will probably be one of the things they discuss with you.
What about Recordkeeping?
No matter what type of business you set up, you need to keep track of what comes in and what goes out. This may be as simple as a spreadsheet (that’s what I used for my tutoring), or you may want to get software like QuickBooks. I use QuickBooks extensively as a part of my job, and I highly recommend it.
Remember too, good recordkeeping includes keeping the support documents for your numbers, like receipts and invoices. From an accounting standpoint, it is almost impossible to run a business well if you don’t know how much money is coming in and where the money goes as it goes out the door.
What types of taxes will I be responsible for?
The type of business structure that you choose will also determine what types of taxes you pay and how you will pay them. You will pay income tax on your net income. You will also more than likely pay self-employment taxes on your net income on your 1040. If you have an employee, you will pay the employer portion of payroll taxes.
If you are selling a product, depending on the state, you will be responsible for collecting sales taxes and sending that in to the government. There are more, these are just the most common. Also, if you do decide to have an employee as a part of your business, then I would recommend you have a bookkeeping program like QuickBooks and sign up for their payroll subscription. It is a very cost effective way to do a small payroll.
(A side note: It is not your decision on whether or not someone who works for you is an employee or a subcontractor. They either are or they aren’t and there are specific guidelines for determining this.)
What’s an Employer Identification Number? Typically, a new business will need a Federal Employer Identification Number (FEIN or sometimes just EIN). It’s basically a social security number for a business. You can go to irs.gov and see if you need to get one for your business.
I hope this gives you some things to think about. Take a look at IRS Publication 583 (Starting a Business and Keeping Records) and Publication 334 (Tax Guide for Small Business) for some more fun reading.
Have you thought about starting your own business, or have you actually done it? What are some other things to consider?
About the author: Kim is an accountant at a CPA firm in Georgia. She will complete the requirements for her CPA license in the summer of 2013.
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