So, you want to start a business; now what?
Five Steps to Starting your Next Adventure
Starting a business is fun and exciting. You know exactly what you are going to do or sell, but there are a few more things to consider. Below are a few questions that clients frequently ask when starting new business ventures.
1. Q: I want to keep my business separate from my personal assets. What type of entity should I use?
A: If you want to have an entity that is separate from your personal assets, it is usually recommended to set up a Limited Liability Company (LLC). An LLC offers flexibility and offers the foundation of the most common entity structures: sole proprietorship, partnership, or S-Corp. Your customers would pay your company and use its Employment Identification Number (EIN), not your personal name or social security number. This helps cut down on identity theft in addition to providing a separate legal entity in the unfortunate case of being sued.
2. Q: How do I officially set up my LLC?
A: The first thing you need to do is register your company’s name with the State of Kansas, here. The name must end in “LLC.” (for example: ABC Company LLC). There are different choices on the type of business so make sure to check with your accountant or attorney if you are not sure which to choose. There is a $165 registration cost and a $50 annual report fee every year when the annual report is filed. Most accountants file this with the tax return.
3. Q: I set up my LLC. Now what should I do?
A: You will need an Employment Identification Number (EIN). You can register for one here.
A: After you get your EIN, you should set up a bank account under your company’s name and new EIN. Make sure to run all business transactions through your company bank account for audit purposes and to help with record keeping.
**Please remember to always consult your attorney when setting up a business. An attorney can help you draft an operating agreement with buy/sale terms and other items that you will need for the future.
4. Q: What part of my business will be taxed? Are there deductions available to me?
A: The net profit of the company is taxable on your personal tax return. Tax deductions can come from many areas. Make sure to track your business mileage and percentage of cell phone and internet use, as these could potentially be deducted on your tax return. Be sure to consult your ABBB advisor about these deductions as well as discussing if you meet the criteria for a home office deduction.
5. Q: How do I get paid from my LLC? How do I get cash out of my company?
A: The most common LLC entity structures are sole proprietorships, partnerships, and S-Corporations. As a business owner of a sole proprietorship or partnership, you cannot be on payroll or have payroll tax withholdings. The IRS states that S-Corp owners must take a ‘reasonable salary’ (via payroll).
A: In all three entity structures, you may take cash out as a distribution proportionate to your ownership. Distributions are not typically taxable. Remember – you are taxed on your portion of the company’s profit every year whether you take out the cash or not. Additionally, now that you are a business owner, make sure to pay in tax estimates throughout the year so that you are not hit with a “surprise” tax liability in April.
There are many aspects that go into running a successful business. These first actions mentioned above could have long-lasting impacts on your new career. If your business is not structured properly, you could potentially be overpaying your tax liability. For a complimentary 30 minute consultation, contact us today!