Start a solid business | Business

Has your favorite hobby become a cash cow? Are you an independent contractor looking for the most tax-efficient entity for your income and expenses? Maybe you’ve spent some time with your employer and are ready to venture out on your own? Whatever your reason, make sure you have the right foundation for your new business to be successful from the start. A popular analogy used in our industry is that of the “three-legged stool”. Without the three legs your business or stool won’t be strong enough to stand up on, so what are those legs?

The first step is to make sure you consult with your chartered accountant (CPA) regarding the appropriate entity to achieve your goals and limit your tax liability. Depending on the expected income, the simple choice of the entity could determine whether you pay between 0% and more than 50% in taxes. There are three main business structures to consider. A Single Member Limited Liability Company (LLC), which does not elect corporate treatment, will be subject to both ordinary income tax and self-employment tax. Although income reported on a K-1 to a shareholder of an S corporation is not subject to self-employment tax, executives are required to receive “reasonable wages” for their services and report as income. ordinary subject to FICA withholding. In a C corporation, profit is taxed to the corporation when it is earned, and then taxed to shareholders when it is distributed as dividends, creating double taxation. Depending on your entity, profession and income, a 20% deduction from qualifying business income may also be available. These are all things for your CPA professional to consider.

The second step is to make sure you hire a business attorney to prepare and file all the appropriate documents for your new business entity. Most entities will need to choose a name and make sure it is not already in use, file various documents at state and federal levels to be properly registered, apply for an Employer Identification Number (EIN) and have ‘Entity agreements and appropriate training materials. Depending on the entity, it may be necessary to have all contributions, equity interests, shares held, information on officers and general partners registered before the ribbon is cut.

The third leg makes a sturdy wobbly stool. A professional Certified Financial Planner (CFP) will be good at helping a new business owner decide on the appropriate financial considerations to further prepare the business for success. This would include suggesting the necessary insurance policies and plans, retirement benefits, appropriate financial instruments to save money for the business, and working with the CPA to properly budget for the future.

You can see why choosing the right entity is important when starting a business, making sure everything is legally legitimate, and making sure the right financial plan is in place. There are different ways to earn income on your own and even more reasons to decide to do so. Whatever your reason, make sure your stool has all three legs to keep you from falling on your face.

Adam H. Baucom CPA / CFP is Senior Tax Director for Keller & Associates CPAs, PLLC and Associate Advisor for KMH Wealth Management, LLC. He has over 10 years of experience in tax planning, tax return preparation and accounting.


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