Congratulations! You are taking the first step in owning your own business! This adventure can be very rewarding, both personally and professionally, but it's also a lot of hard work. It is nice to know that when you are giving 110% effort, 110% reward is potentially going back into your own pocket and not the shareholders or airline executives.
According to the Small Business Administration, approximately 580,900 small start-up businesses opened their doors in 2004 - and just as many closed them. Starting up a small business is difficult, so don't be discouraged if it takes a while for yours to get off the ground. About 50% of small businesses fail, they do not fail because the product they sell or service they provide is not needed or desired, the fail because the business owner may know how to make a widget, but they don’t know how to run a business… let us help!
Here are some questions to ask yourself to determine if you've got what it takes to go into business:
Are you the entrepreneur type?
Business owners should be prepared for long hours, handling taxes throughout the year and tax preparation, small business bookkeeping, liability issues and much more. But as a business-owner-to-be, these considerations may pale in comparison to the thought of being your own boss. Your profession offers a tremendous amount of flexibility in starting your own business. You will be able to grow your business and take leaves or opt to fly lower time providing you with the best of both worlds!
Here are some questions you may want to ask yourself regarding starting a small business:
Am I mentally, financially and physically up for the challenge?
This is a hard question to ask yourself. Although being a small business owner may be your dream, you'll need to be prepared to deal with a few nightmares along the way. Especially stress. Doing adequate research and following a detailed, yet flexible, business plan will help alleviate some of the night terrors. However, know that you may experience some hardships along the way.
Why do I want to start my own business? What is my motivation?
Money, power, a sense of personal accomplishment? What are your primary reasons for starting your own business?
What experience or expertise do I have that is valuable? What do I not know?
Separate what you know and what you're good at from what you don't know and what you know you're not good at. There's no shame in asking for help or hiring people to help you with the aspects of your small business that you may not be comfortable with. Afraid of small business bookkeeping? You can buy small business software to help you or outsource this work to a professional bookkeeper.
What type of business structure do I need – Sole Proprietorship, S-Corp, LLC?
How you structure your small business will determine how you run the operations, employ workers, and pay state and federal income taxes. There are many different types of business entities: sole proprietorship, general partnership, C Corporation, S Corporation and LLC (Limited Liability Companies). Learn more about each of these options and see which is the best choice for your business. Here are the details!
Who would want to purchase my small business's product or service?
You'll want to do some research on who would purchase your product or service. Marketing strategies vary whether you're selling to other businesses or to individual customers.
What sort of competition am I up against?
Research companies that offer services or products similar to yours, then brainstorm on how you can differentiate your small business from the pack.
How will I finance my venture?
No matter where you go for a loan, whether family, investors, and/or banking institutions, they'll all want to know one thing: How much money and resources are you contributing to the overall success of your start-up business? There are many creative ways to finance start-ups, including many government programs that offer assistance.
Do I have the discipline to plan my business carefully so I can avoid mistakes?
There are some things you can't plan for, but many problems can be avoided with some advanced thinking.
Getting Started (back to top)
One key way to organize your thoughts about starting up a business is by developing a business plan. Writing a detailed plan about how you're going to succeed will help you make some tough decisions:
This link will provide you with additional information on writing your own successful business plan. The Business Plan
Once you've finished a solid small business plan, you'll have a better idea of how to start up your business and how to make it a success.
Read the following text, sleep on it, get up, have a cup of coffee, read it again and then call Brett. Once you understand the basics of the different types of business structures, you will be able to ask questions and understand the answers specific to your situation!
Sole Proprietorships
A sole proprietor is an individual operating a small business as a self-employed person. The owner is liable for all business debts and actions and receives all the profits and losses from the business. If the proprietor's net self-employment income is $400 or more, he or she also pays self-employment tax.
Advantages
A sole proprietorship is an easy start-up business to organize.
There are few legal restrictions.
The proprietor has total decision-making control.
Recordkeeping and accounting are relatively easy.
If the owner wishes to dissolve the small business, he or she can do so easily and with minimal federal income tax consequences.
Disadvantages
The proprietor (and spouse, if a joint return is filed) bear(s) the total legal and financial risk for the small business.
The owner's liability extends beyond the business property to his or her personal property.
The owner may have trouble raising needed capital.
Business skills are limited to the owner's (and his or her employees') ability.
Personal federal income tax cannot be deferred by retaining profits.
Partnerships
A partnership, either general or limited, is a contractual association of 2 or more persons carrying on a business. Each partner contributes property or services and shares in the profits. Partnership formation can be informal and inexpensive.
Limited partnerships differ in that a limited partner has only a limited amount of liability in the company. That limited liability is equal to the amount that the partner has invested into the company.
Advantages
DisadvantagesA partnership is an easy start-up business to organize. It provides a vehicle under which spouses can be considered equal owners in a business.
Because children may be partners, some income may be taxed at lower rates than if it were all reported on the parents' federal income tax return(s).
A partnership offers better financial strength than a sole proprietorship, and more than one person's skills and judgments are available.
A partnership has legal status.
Each partner has an interest in the small business, and active partners may use losses to offset other income.
The partnership may or may not dissolve on the death of a partner, and partnership interests may be sold to others
The partners generally take all the risks in a partnership, and general partners are liable to the extent of both business and personal property.
Limited partners' losses are subject to the passive loss rules. For purposes of the passive loss rules, income must be divided into 3 categories: active income, passive income and portfolio income. Passive income is income for assets such as real estate. General partners must be able to show material participation to avoid passive loss limitations.
Shared decision-making may create problems among the small business decision-makers.
General partners must pay self-employment tax on the partnership's trade or business income.
Federal income tax cannot be deferred by retaining profits at the partnership level; partners pay tax on partnership income whether it is distributed or not.
Disagreements among partners may be difficult or impossible to resolve.
State and federal reporting requirements apply.
The business terminates if more than 50% of the ownership changes.
Taxable (C) Corporations
A corporation is a business entity with its own legal identity, rights and liabilities. Characteristics of a corporation include continuity of life, central management, limited liability of the owners (stockholders or shareholders), and free transferability of ownership. In general, a corporation is formed by incorporating under state law by filing articles of organization and paying the state's incorporation fees.
Advantages
A corporation exists until it is dissolved; it does not dissolve at the death of a shareholder.
A corporation may have 1 or many shareholders.
Ownership transfers through stock sales have no tax effect on the company and are easy to accomplish.
Capital can be raised through stock sales.
Management duties are shared.
A corporation offers limited liability; in general, a shareholder is liable only to the extent of his or her investment in the corporation and for debts he or she personally guarantees.
A corporation can offer tax-sheltered fringe benefits to its employees, including shareholder-employees.
Corporate tax rates may be lower than individual rates.
Children can own stock.
Disadvantages
Corporate income is taxed twice, once at the corporate level and again at the shareholder level as dividends. Although the Jobs and Growth Act of 2003 has reduced the federal income tax paid on qualified dividends, the double tax still applies.
Personal service corporations are taxed at a rate of 35%.
Corporations can be difficult and expensive to organize, and the corporate charter restricts the types of business activities a corporation can pursue.
Corporations can have complex legal and accounting requirements, which is not bad unless the stock is publicly traded.
Shared decision-making may create problems among the decision-makers.
A corporation cannot simply stop doing business but must liquidate, and liquidations and distributions of corporate assets are taxable events.
The corporation's losses can only offset corporate income. Corporate losses are not passed through to shareholders but instead are carried to years when the corporation has profits.
S Corporations
An S corporation is a "pass-through" entity formed by making an election when filing Form 2553 with the IRS. S-corporation income and losses are passed through to the shareholders; income is taxed at the individual level. An S corporation must meet certain restrictions regarding its shareholders and cannot be included on a consolidated return. However, an S corporation can be a partner in a partnership or own all or part of other corporations. S corporations must satisfy state incorporation requirements.
Advantages
Net S corporation income is not taxed at the corporate level. The income is not subject to double taxation as in the traditional C corp. A S corp. is considered a flow-through entity meaning that the profit or loss flows through the corporation to its shareholders and is not taxed twice.
S corporations offer limited liability. In general, a shareholder is liable only to the extent of his or her investment or debt he or she personally guarantees.
It is possible to shift income by giving children shares of S corporation stock.
The business does not dissolve at the death of a shareholder. Some or all beneficiaries in a family S corporation can actively carry on the business.
Materially participating shareholders can offset other income with S corporation losses.
Shareholder-employees are not subject to self-employment tax on S corporation profits, and income is taxed only at the shareholder level (unless the S corporation has accumulated C-corporation earnings and profits).
Disadvantages
An S corporation can have no more than 100 shareholders and cannot have nonresident alien shareholders. The S corporation can have only individuals, estates and certain trusts as shareholders.
An S corporation only has limited flexibility in choosing a tax year.
Shareholders are taxed on S corporation profits, whether the profits are distributed or not.
Children are employees of the corporation, so the FICA/FUTA exemptions for children employed by their parents do not apply.
Shareholder-employees who perform services and are paid little or no wages are likely to have distributions reclassified as wages.
Fringe benefits provided to more-than-2% shareholders are subject to tax. Qualified retirement plan contributions are based on the employee shareholder's wages, not on the overall profits of the company.
LLCs
A limited liability company (LLC) is a hybrid organization combining the pass-through ability of a partnership with the limited liability features of a corporation. LLCs are organized under state law; there are filing fees associated with the organization of the LLC. LLCs with 2 or more members are taxed as partnerships unless they elect to be taxed as corporations. A single-member LLC is taxed as a sole proprietorship unless it elects to be taxed as a corporation.
Advantages
An LLC can have more than 100 owners. It can be owned by a corporation or be part of an affiliated group.
LLCs need not make a special IRS election to receive LLC treatment (unlike S corporations with Form 2553).
Gains, losses and other tax attributes are not taxed at the entity level but pass through to the LLC members.
In general, no gain is recognized on the transfer of property to the LLC by from its members or on distributions of property other than cash to a member until the member disposes of property.
Disadvantages
LLC managers are subject to self-employment tax on the entity's trade or business income.
LLCs must set termination dates and must terminate if their ownership changes by 50% or more in a 12-month period.
An LLC may need to file as a tax shelter if it has members who are treated as limited partners or "limited entrepreneurs" (persons who are not limited partners and do not actively participate in the LLC's management).
The positive is that your business is going to be a success, right? That's because you have fail-safe plans to get your start-up business going and keep it that way. Unfortunately, it's not enough to have it in your head; you need to write these plans down and figure out how to make your dreams come true.
The business plan is important not only for you, but for investors and lenders. If you want to get financing for your small business, you will need to show potential lenders a well-written and complete business plan. But don't panic yet. You may already know a lot more than you think.
A business plan is a document that describes the nature of your business. It also outlines the future plans and strategies you're going to implement in order to reach your goals. You can't plan for everything, but investigating where you may have difficulty might help you down the road.
Most successful small business owners start with a loose plan and revise it as more details become available. Some of the crucial areas to cover in a business plan are:
Help in Writing a Business Plan
Many Web sites, small-business software programs and agencies are available to assist you in writing a business plan for your start-up company. Remember: You may not have all the information you need all at once. Be patient and diligent, and you'll have a solid business plan in no time. If you have any questions – don’t hesitate to call us to help direct you in getting started.
So you have your product or service, you’ve got a great name, the money is saved up and you are ready to roll!
Use the resources below for answers to some of the most common tax questions that arise from running a small business.
Automobiles(back to top)
Should you buy or lease vehicles for your small business? Well, it depends on the vehicles' purposes. The costs of operating and maintaining your vehicles could turn into tax deductions.
If you use your automobile or reimburse an employee for using an automobile, you have two methods available for claiming car and truck expenses on your federal income tax forms. The two methods are actual expenses or the optional method.
Actual Expenses
If you use the actual expense method, you will claim the business portion of the actual expenses paid to run the vehicle. Actual expenses include the cost of gas, oil, insurance, tires, licenses, repairs, garage rent and cleaning. If the car is rented, the lease or rent amount is also deductible (within limitations).
If you own the car, you can claim a depreciation tax deduction (see depreciation).
Optional Method (standard mileage rate)- yeah, this is the one to use!
The second method is known as the optional, or standard mileage rate, method. Business owners who own or lease their cars and who don't operate a fleet of vehicles for their businesses are eligible for this method.
Under this method, the total business miles driven during the year are multiplied by the standard mileage rate, which is 50.5 cents per mile for January 1, through June 30, 2008 and 58.5 cents per mile for July 1 through December 31, 2008. Business owners should take this into account when calculating income and expenses or paying the expenses of employees.
Note: The optional method may only be used if you: 1) own the car and used the optional method in the year the car was placed in service (for vehicles placed in service after 1980), or 2) lease the vehicle and use the optional method for the entire lease period.
(For leases beginning before Jan. 1, 1998, the entire lease period means the part of the lease period after Dec. 31, 1997.)
Additional Expenses
The standard mileage rate is considered to cover most of the ordinary expenses listed under the actual method. However, certain expenses may be claimed using either method. These include:
Cons:
Employees
If you hire employees, you must withhold state and federal income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages.
However, there are benefits to having full-time or part-time employees. Employees may be hourly or salaried, depending on the work plan laid out by the business. And, you generally have more control over their work.
Pros:
Cons:
Only you will know what is right for your small business. But whatever you choose, make sure you clearly list the expectations of workers prior to hiring anyone. And, you may want to hire a contractor or employee on a temporary basis to see if they fit with your overall business ideals.
Depreciation (back to top)
When you buy new equipment for your small business (machines, computers, automobiles, telephone systems, furniture, fixtures, etc.), you generally will not write off the cost of these items right away. Instead, you depreciate the item, which means that you allocate or write off the cost of those purchases over a set period of time.
Business Equipment
Most business equipment is depreciated over 5 years (computers, automobiles, copiers) or 7 years (furniture and most other machinery) under a method called the modified accelerated cost recovery system, or MACRS. Depending on the recovery period, MACRS applies specific percentages that permit you to recover or write off more costs in the earlier years of ownership.
Special rules apply to the depreciation of passenger automobiles. Generally, depreciation is limited to something less than the MACRS percentages.
Different recovery periods and methods apply to transportation equipment, real estate, and other kinds of property. For detailed information on MACRS, see IRS Publication 946, How to Depreciate Property.
Section 179 Deduction (back to top)
The Section 179 tax deduction benefits businesses that have property with a useful life of more than 1 year. Although generally the depreciation of the property is spread across many years, a sole proprietorship, corporation or partnership can elect to receive the federal income tax benefits in 1 year. This is possible through the Section 179 tax deduction.
For a list of eligible property, consult IRS Publication 946, How to Depreciate Property.
Bonus Depreciation for 2008
You may be able to take an additional first year special depreciation allowance for qualified property. The allowance is an additional %50 of the amount of the property’s depreciable basis before figuring regular depreciation deduction for the asset The property must be new and have a depreciable life of less than 20 years.
GO Zone Bonus Depreciation
Write-offs Exceeding Net Income
The Section 179 deduction cannot be more than all of your business taxable income from all sources, including wages. Any excess tax deduction may be carried over to future years until it is depleted.
If the rest of your depreciation expense (other than the Section 179 deduction) exceeds your income, you will have a net operating loss (NOL). If you cannot absorb the NOL on your current tax return, you may carry the loss back for 2 years (that is, use the NOL to offset earlier years' taxable income) and/or forward up to 20 years.
Other Things to Consider
If you forego the extra first-year write-offs, do you lose them?
No. You are choosing to allocate more of the write-off of your equipment's cost to future years, when it may be more beneficial.
Do you have enough income to cover the Section 179 tax deduction and the bonus depreciation?
Section 179 carryovers, NOLs, carry-backs and carry-forwards create complications on your federal income tax return, including, but not limited to additional paper work, tricky calculations, and additional tax preparation fees.
Are these complications worth it?
Perhaps. There is no hard and fast rule to determine the best depreciation decision for your small business. You'll need to consider past, present and estimated future income. Your tax professional can help you to make the best choice.
Paying Estimated Taxes (back to top)
If you think you'll owe more than $1,000 in taxes, we will need to do one of two things. We can adjust your airline W-4 to increase your monthly withholdings to compensate for your self-employed earnings. Or, you'll need to make estimated tax payments throughout the year. That means April 15, June 15, Sept. 15 and Dec. 15 are all tax days. Sometimes it just kills you to write out that check to Uncle Sam – so it may be less painful to adjust your W-4. Call us, we can help you do either of these!
If you choose to do go the estimated payment route - we can set up your estimated taxes so that they're paid in even amounts when due. Don't forget that you may also have to pay state and local taxes in addition to federal income tax on an estimated basis.
The Methods of Calculating Estimated Tax
Where to Start
Employers of individual workers are responsible for the accurate and timely withholding of several types of taxes. Prior to hiring a worker, a domestic employer must accomplish two tasks - obtain an Employer Identification Number (EIN), and verify that the individual is eligible to work in the United States.
An employer can obtain an EIN by mail, telephone, facsimile, and online.
Employers should verify that a worker is eligible to work in the U.S. by reviewing the employee's government-issued identification, and if necessary, requiring the employee to complete Form I-9. The employer must keep the Form I-9 on record either for three years after the date of hire or for one year after employment is terminated, whichever is later. The form must be available for inspection by the authorized U.S. Government officials.
After the worker is hired, the employer must determine the status of the worker. If the worker is an independent contractor, the employer simply pays the agreed-upon fees for services to the worker and does not withhold taxes. The worker is responsible for calculating and paying unemployment taxes to the government. However, if the worker is an employee, the employer must obtain a completed Form W-4 from the employee, withhold funds for income, Social Security and Medicare taxes, and pay FUTA and SUTA (State Unemployment Tax) taxes, as well as the employer's share of Social Security and Medicare taxes.
Paying Payroll Taxes
In general, the employer must file Form 941 four times a year and pay his or her share of Social Security and Medicare taxes, plus the federal income tax, Social Security tax, and Medicare tax required to be withheld from employees' wages. However, if the expected total of these taxes is $1,000 or less for the year, the employer can file just once per year using the new federal income tax form, Form 944.
Generally, employers must deposit withheld taxes by submitting them to an authorized Treasury Tax and Loan depository organization, or deposit them electronically with the Electronic Federal Tax Payment System (EFTPS). Employers with quarterly tax liabilities of less than $2,500 can pay with Form 941; those who are eligible to file Form 944 may pay with that federal income tax form.
The Earned Income Tax Credit (EITC)
Employees who are eligible for EITC may choose to receive more than half of the credit during the year, rather than waiting to receive it in full when filing the following year's federal tax return. Employers must notify employees who have no income tax withheld that they might be eligible for the credit, so that eligible employees will file returns and claim the credit.
Special Employment Relationships
Household employees: If the worker is a household employee (the taxpayer's employee who performs non-business services in the taxpayer's home), the employer may be responsible for withholding income, Social Security, Medicare taxes, as well as paying FUTA and SUTA. Whether the employer is required to withhold and pay state and federal income taxes depends upon the age and relationship of the employee, as well as the amount the employee is paid.
Farm employees: Farm employees are subject to FICA (Social Security and Medicare) withholding if the employer has at least one employee who was paid more than $150 cash wages during the year, or the employer paid at least $2,500 to all farm employees during the year.
Statutory employees: Statutory employees are workers who are employed in specialized types of work, and are subject to FICA withholding, but not income tax withholding.
Employees who receive tip income: Employees who receive more than $20 in tips during any month from work performed under a single employer are required to report the tip amount to the employer, who must withhold income and FICA taxes, as well as pay FUTA and SUTA taxes on the amounts reported.
Business owners who employ relatives: Many sole proprietors employ family members in their small businesses. Here's a brief list of the payroll tax requirements that employers of relatives face:
Wages paid to the proprietor's child who is at least age 18 but under age 21, or to the proprietor's spouse, are subject to Social Security and Medicare tax but not to FUTA.
Wages paid to the proprietor's child under age 18 are not subject to Social Security, Medicare, or FUTA tax.
SUTA taxes, which vary from state to state.
All wages are subject to income tax and must be included on the spouse's or child'stax return.
The proprietor does not issue a W-2 for his or her own "salary" nor does he or she take a tax deduction for it on Schedule C.