What event in your childhood most influenced who you have become today?
I loved reading about the Founding Fathers, particularly Thomas Jefferson. I loved that we rebelled against someone from a far off government who gave us too many rules to follow and burdened us with taxes on everything. As a CPA, I see myself as someone who makes sure that people don’t pay too much in taxes, and can hold on to their money to build the life of their dreams.
What viable options are there for sidepreneurs to use to structure their businesses?
- Sole proprietorship: This is just you hanging out your shingle and calling down to city hall to register your business. Any income less the expenses you incur is taxed at your personal income tax rate.
- LLC, or Limited Liability Corporation: With this business structure, you pay taxes at your personal income tax rate. Many business owners like this structure because it offers some protection of your personal assets in the event of a lawsuit.
- Partnership: In a partnership, you and someone else (or more than one someone else) have joined to operate a business. In a partnership, you pay taxes on your share of the partnership income. You report your income on your 1040, and you pay taxes at your personal tax rate. A partnership’s income tax return is involved. You will be spending more time putting the forms together.
- Corporation: This legal structure provides the most liability protection for your personal assets and has lower tax rates. However, it is the most difficult to form. States need more information when you file a corporation than when you form an LLC. You also have to face more reporting requirements during the year. A corporation’s tax returns are complicated; requiring more time (or money) invested to prepare them.
What is the most common mistake you see side business owners making with the legal structure of their businesses?
New business owners often assume they need to incorporate right away. If you are just starting out and don’t need a lot of liability protection, you may only need to work as a sole proprietor or an LLC. If you get concerned about liability if something goes wrong, talk to an insurance agent about business insurance.
What process should we use to find the right legal business structure?
- Determine how many people are going to be involved. If more than one, you need to decide if you want to set up a partnership or a corporation. Run it past an attorney or CPA to see if you have missed anything you need to consider.
- Get an Employer Identification Number (EIN) from the IRS. The process is quite simple, and you can get a number pretty much immediately.
- Contact your state’s Secretary of State’s office and register your business. They can provide you with some additional guidance if necessary.
- Register your business with your local city or county.
- Set up a business bank account. Do not use your personal checking account to pay for things for your business. It may make things harder if you buy things, like computers, for your business that could also be for personal use.
What business structure will offer the most tax benefits and liability protection?
In a sole proprietorship, all income is passed through to the owner and taxed at the owner’s rate on their 1040. All the owner’s assets (house, car, furniture, etc) are at risk and can be used by the business’s creditors to pay the business’s debts.
In a partnership, each partner’s share of the partnership’s income is passed through to the partner. Each partner is taxed on their personal 1040 at their personal tax rate. Any liabilities incurred by the partnership are owed by every partner. Each partner’s personal assets are at risk in full if a creditor seeks to be paid for the debts incurred by the partnership.
The earnings of a C corporation are taxed at corporate income tax rates. When earnings are distributed to the stockholders they are taxed at the personal level. While there is a deduction allowed for salaries, you still have to pay individual taxes on the salaries paid to owners. On the plus side, the shareholders have much more protection of their personal assets. Only the amount they contributed to the corporation for a share of ownership at risk of loss.
For an S corporation, the shareholder’s share of the corporation’s income is passed through to the partner. Each partner is taxed on their personal 1040 at their personal tax rate. They have the same liability protections as a C corporation.
An LLC has limited liability, which means that a creditor can only go after the business assets and not the personal assets of the owner. These protections do not apply if the owner does something illegal or personally guarantees a loan. Like a sole proprietorship, the business’s income is passed through to the owner and taxed at the owner’s rate on their 1040.
The LLC provides liability protection of your personal assets without the reporting requirements of a corporation. Business insurance can protect an owner from lawsuits. In that event, an unhappy customer or vendor is prevented from taking the owner’s personal assets. In my tax practice, I have something called Errors and Omissions insurance that will protect me if I make a mistake on a tax return. Talk to your insurance agent about what is available.
How can we avoid over-paying on payroll expenses?
It really depends on the number of employees and the state. If you are a single person business with a sole proprietorship or LLC, you are taxed on the income of the business on your return. In that case, you can’t deduct a salary you pay yourself. If you do have employees, you may have to file reports on a frequent basis even if you are the only employee. The frequency depends on your state’s requirements. At the federal level, you will need to file quarterly and annual reports to show the Social Security Administration and the IRS what was paid during the quarter.
How can we make managing the legal requirements for reporting and taxation efficient and affordable?
You may have to register your business with your town or county. Find out what office handles business registration. Ask them what you need to do to meet state requirements. They should know what your state requires for new business registration. They should also be able to tell you if there are any restrictions on your type of business and on the place you will be conducting business.
Make an appointment with the Small Business Development Center in your area. Volunteers who work there after having served in the business world will be happy to advise you on a course of action.
Before you get everything set up, talk to a CPA about your plans. They can help you get your books set up. This makes tax time easier. A good CPA can also show you how to monitor your results so you can make good decisions about your business.
Do you have any special offers for our sidepreneurs?
I am offering a free one-hour consultation for fans of your website to discuss any concerns they have about their finances. They can drop me a line at [email protected] to set up a day and time to chat.