We have the smartest and the most clever accountant in the world. So we asked him to write an article about starting a business and the accounting setup needed. Here's what he wrote, it's solid advice from an accountant that saves us tons of money.
1. KISS. Keep it simple starting out. The simplest form of entity for running your first business is called a sole proprietorship. This form of ownership requires NO special communication or filings to the Internal Revenue Service until you start paying employees.
2. As a sole proprietor you are the owner/entity which might require only to acquire an occupational license if your county or municipality mandates one. As the owner, you are also liable to remit all state or city tax collections on retail or wholesale sales your business collects. Service businesses and most cross state sales are exempt from state tax collections.
3. If you are concerned about personal liability as a sole proprietorship then do the cheapest and simplest thing which is to buy a personal liability umbrella policy. The best way to avoid liability is to learn your trade well and keep accurate records on LessAccounting.
4. Concentrate on building your business not communicating with the IRS. As a sole proprietor, the IRS will not even know you exsist until after you file your first personal income tax return. This return will include a Schedule C which communicates all of the sales and expenses you recorded in LessAccounting on your business. These sales and expenses do not have to be in a separate bank account as mandated by the LLC or Incorporation format. The sole proprietor losses offset your day job's income to provide a possible tax refund.
5. Over 90% of small businesses fail or change ownership within the first five years. Plan your business to thrive but if it fails under a sole proprietor you simply stop doing business. No communication or special forms with the IRS, no additional taxes to get your investment returned and no high accounting fees to close out your entity. Simply file a final Schedule C with your next personal return. KISS.
6. How do you get paid as a sole proprietorship? Simply take the money out as a draw. No payroll taxes or quarterly forms needed. Most startups lose money for the first several years, so keep your day job to pay your living expenses.
7. After you pass the five year hurdle, then you can talk with a CPA about another entity type that might save you taxes. Again a simple bookkeeping entry transfers all of the business assets from the sole proprietorship into the new entity without any tax penalties. Then quit your day job to celebrate your new livelyhood.
7 Accounting Tips for Beginning Businesses - To learn more about this author, visit Allan Branch's Website.
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