Entrepreneurship can be exciting as many business owners enjoy the freedom and flexibility of earning a living through something they founded. While business plans are essential to forming any new entity, we recommend that entrepreneurs consider adding business entity structure, tax planning, and financial management practices to their early planning. Integrating these processes into your business planning can alleviate the stress of day-to-day finance, administration, and last-minute tax planning.
We have five considerations for all early-stage and new entrepreneurs to implement into their business planning.
1. Choosing the appropriate business structure:
The most common business entity types are:
- Sole Proprietorship (or Single Member LLC)
- Limited Liability Corporation
- Corporation (C-Corporation)
- Nonprofit Corporation
A strong understanding of the business entity types can greatly benefit entrepreneurs planning to grow their ventures. Many companies start as Sole Proprietorships during the “proof of concept” phases and evolve into Limited Liability Companies and, subsequently Corporations/S-Corporations. In the early planning stages, we recommend that entrepreneurs share their business plans and future goals with a tax professional to determine the most appropriate structure and tax strategy for growth.
2. Understanding the fees and taxes related to business ownership:
Once a business owner determines its entity structure, the next step is determining its tax filing (federal and state) and business reporting and filing requirements. Often, business owners obtain an EIN (Employer Identification Number) from the IRS and register with their state, unaware of the quarterly, semi-annual, and annual filing requirements to keep their businesses in good standing. Examples are estimated tax filings, sales and use tax filings, payroll filings, personal property tax returns, and other compliance-related reporting.
A few questions that a business owner might want to answer are:
How will my company structure impact my personal taxes?
- Personal tax implications will vary by entity type. Example: For a Single-Member Limited Liability Company (LLC), the entity is filed as part of the business owner’s personal taxes (IRS Form 1040: Schedule C).
How will my entity type impact Self Employment Taxes?
- Self Employment Tax is assessed for all self-employed individuals (Sole Proprietorship & Single Member LLC) and represents 15.3% of net earnings. This 15.3% represents 12.4% Social Security Tax and 2.9% Medicare Tax, respectively.
- LLCs taxed as Corporations, C-Corporations, and S-Corporations allow owners to be considered employees. They are not subject to Self Employment Tax as these taxes will be withheld through payroll.
What taxes are my entity subject to, and when are they due?
- Estimated quarterly taxes should be calculated and remitted to state and federal governments per each schedule. Business owners should work with an accountant to create a yearly tax payment strategy.
- Depending on entity type, such items as employee payroll withholdings, sales and use taxes, personal property taxes, and contractor 1099 forms will be filed on time to avoid late fees and penalties. Business owners should create both IRS and state tax filing schedules for all applicable taxes to prepare to file on time
STATE COMPLIANCE CONSIDERATIONS:
What do I need to do to keep my business in good standing with the state of the organization?
- Business owners should create a schedule of required reports and deadlines to ensure that their organizations comply with their state of organization.
- We recommend that business owners integrate these deadlines into their business plans.
What happens if I choose to close my business?
- EIN (Employer Identification Number) cannot be canceled once issued by the IRS.
- To dissolve an entity, business owners will likely have to file Articles of Dissolution with the state that the entity is organized. We recommend consulting with an attorney or accountant to dissolve an entity.
- All tax returns and required reports must be filed to dissolve a business entity effectively.
BUSINESS ACCOUNTING & RECORDKEEPING
3. Keeping track of how much the owner contributes to the business:
Once an entity is formed, keeping the business’s financial affairs separate from the owner’s personal financial affairs is advisable. Many new business owners use personal funds as “seed money” or “start-up” funding. These funds should be tracked in detail to include the investments’ date, amount, and purpose. Similarly, when equipment or supplies for the business are purchased using the owner’s funds, the receipts for these items should be kept for accounting and tax records. Any investment made into the business using the owner’s funding is considered “Owner’s Equity.” Owner’s Equity details how much the owner has invested in a company over time. Additionally, as the company earns profits, these profits are added to Owner’s Equity as Retained Earnings.
Our recommendations for keeping money separate:
- Creating a separate bank account for a business entity
- Tracking all investments of the owner’s cash/capital into the company detailing purpose, amount, and date
- Keeping receipts for materials, services, and equipment purchased using the owner’s funds
- Implementing an accounting system to keep track of business transactions and payments
4. Keeping track of how much the owner withdraws out of the business:
Equally as important as tracking owner contributions is tracking when a business owner withdraws money from a business. Owners often seek to “pay themselves” once a business generates profits. Withdrawing cash from a business is called an “Owner’s Draw.” Owner’s Draws should be supported with documentation that details the date, purpose, and amount of each withdrawal for accounting and tax purposes.
A few don’ts:
- Owners should not withdraw more than the value of the Owner’s Equity unless they are sure the company will have future profits.
- Owners should not use their business bank account for personal transactions or co-mingle funding from the business for personal transactions.
- Owners should refrain from paying themselves as a vendor/contractor of the business. As the owner of a company, the owner can use the Owner’s Draw for this purpose.
BUSINESS SYSTEMS & PROCESSES
5. Automating financial systems and processes:
Creating financial systems and processes early in business planning can assist with communication, money management, and organizational compliance. Below are some considerations for small business owners to integrate business processes and streamline administrative processes. Advancements in technology have led to many system integrations that make processes like accepting payments, making vendor payments, payroll, credit card management, and other administrative tasks simple. We recommend creating workflows and timelines for all of your business processes. Below are a few recommendations for small and medium-sized businesses.
Selecting an accounting system that integrates well with banks, credit card companies, payment processors, and payroll systems allows all business activities to integrate seamlessly.
- Accounting System Recommendations: QuickBooks, Xero, Wave
- Accepting Payments from Vendors (this will vary significantly by industry)
- Making Payments to Vendors: Bill.com
- Payroll Processing: Gusto, Paylocity, Paychex
- Workflow Management Tools: ClickUp, Asana
- Company Data Warehousing & Productivity: Microsoft 365