Has your favorite hobby become a cash cow? Are you an independent entrepreneur looking for the most tax-efficient business for your income and expenses? Maybe you’ve spent some time with your employer and are ready to venture out on your own? Whatever the reason, make sure you have the right foundation to make your new business successful from the start. A popular analogy in our industry is that of the “three-legged chair”. Without the three legs, your store or stool will not be stable enough to stand on. So what are these legs?
The first step is to make sure that you are consulting your Chartered Accountant (CPA) in the right place to help you achieve your goals and limit your tax liability. Depending on the expected income, the simple choice of the company can determine whether you will pay between 0% and more than 50% in tax. There are three main business structures to consider. A sole proprietorship with limited liability (LLC) that does not elect corporate treatment is subject to both ordinary income tax and self-employment tax. While income reported to an S corporation shareholder on a K-1 is not subject to self-employment tax, executives must receive a “fair wage” for their services and report it as ordinary income, which is subject to FICA withholding tax. In a C corporation, profits are taxed on the corporation and taxed as dividends upon distribution to shareholders, creating double taxation. An eligible business income allowance of 20% may also be offered depending on your company, your profession and your income. These are all things your professional CPA should consider.
The second step is to make sure that you hire a business lawyer to prepare and submit all of the documents required for your new business. Most businesses will need to pick a name and make sure it’s not already in use, submit various state and federal documents to be properly registered, apply for an Employer Identification Number (EIN), and have agreements. company and appropriate incorporation documents. Depending on the company, it may be necessary for all deposits, equity holdings, shares held, information about officers and general partners to be captured before cutting the tape.
The third leg makes a wobbly stool stable. A Professional Certified Financial Planner (CFP) is adept at helping a new business owner decide on the right financial considerations to keep the business focused on success. This would include suggesting the necessary insurance policies and plans, retirement benefits, the right financial tools to save money for the business, and working with the CPA to budget well for the future.
You can see why choosing the right business is important when starting a business, making sure everything is legally legitimate, and the right financial plan is in place. There are many ways to earn your own income and even more reasons to choose it. Whatever the reason, make sure your chair has all three legs so it doesn’t fall on your face.
Adam H. Baucom CPA / CFP is Senior Tax Director at Keller & Associates CPAs, PLLC and Associate Advisor at KMH Wealth Management, LLC. He has over 10 years of experience in tax planning, tax return preparation and accounting.