Money Girl answers a listener's question: What should entrepreneurs consider when starting a business? You'll learn five tips to protect your liability, cut taxes, stay organized, and find professional help.
Here are the forms that each entity must typically submit:
- Sole proprietorship: Form 1040, U.S. Individual Income Tax Return and Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship)
- Partnership: Form 1065, U.S. Return of Partnership Income and furnish copies of Form 1065, Schedule K-1 to the partners
- LLC: can be taxed as a sole proprietorship (if there is just one member), a partnership, or a corporation. An LLC is an entity allowed by state statute, so each state may have different regulations.
- Corporation: Form 1120, U.S. Corporation Income Tax Return
- S Corporation: Form 1120S, U.S. Income Tax Return for an S Cor poration and furnish copies of Form 1120S, Schedule K-1 to the shareholders
Additionally, when you have pass-through income where no taxes are withheld, you’re also responsible for paying self-employment tax. This is similar to the Social Security and Medicare taxes withheld from most workers’ paychecks. You pay it using Form 1040, Schedule SE.
And since your self-employment income is not subject to withholding, you’re required to pay quarterly estimated tax, if you expect to owe at least $1,000 in federal tax for the year. You make estimated payments using Form 1040-ES, Estimated Tax for Individuals or Form 1120-W, Estimated Tax for Corporations.
To learn more, visit the IRS page called Which Forms Must I File? and the U.S. Small Business Administration’s State and Local Tax Guide.
Although it’s not against the law to mingle your business and personal finances, it makes filing taxes, monitoring the status of your business, working with an accountant, and even selling your business, much more difficult.
Tip #3: Separate Business and Personal Transactions
Keeping your business and personal transactions separate is important because you have to report business income and expenses to the IRS each year.
For instance, if you don’t have a system to know which restaurant meals were personal and which ones were with potential customers, you might forget to claim those qualifying expenses as a deduction. I’ll cover more about deductions in the next tip.
Although it’s not against the law to mingle your business and personal finances, it makes filing taxes, monitoring the status of your business, working with an accountant, and even selling your business much more difficult.
To stay organized, you could mingle personal and business finances but be meticulous about categorizing them using accounting software such as Quicken or QuickBooks. Or you can open a separate business bank account. I’ve managed businesses both ways.
When choosing a bank for business, consider what's most important to you. Do you want a local branch or do you prefer to use services remotely?
While free personal checking is common, banks or credit unions typically charge fees for business accounts, depending on your volume of transactions or for online banking services.
Large banks may offer lower fees and more online services, but small banks may be more likely to give loans to businesses in their community and offer personalized services.
To open up a business checking account, you'll need documentation for your entity. For instance, with a sole proprietorship you need a Social Security number or a tax identification number (TIN). With an LLC, you need your TIN and articles of organization.
If your business name doesn’t exactly match your real name, you’ll typically need to register your business name with the proper authorities in your state. This process is known as filing a fictitious name, registering a “doing business as” or DBA name, or registering a trade name.
You register a DBA name with your county clerk’s office or with your state, depending on where you live. But most banks I’ve worked with provided me with the necessary DBA form when I applied for a new business account.
In addition to paying less tax, qualifying tax deductions can give you nice perks like having a meal at a terrific restaurant with potential clients, combining a business trip and a vacation, and having a home office.
Tip #4: Understand Business Tax Deductions
Tax deductions are a legal way to cut your tax bill, so take every one that you can! But in order to do that, you need to get familiar with which expenses are partially or fully deductible.