Crystal Faulkner and Tom Cooney regular columnists for BusinessWise (Photo: The Enquirer/Meg Vogel)
Question: I have decided to start my own business, but I’m new to this. Do you have any advice I should keep in mind while getting started?
A: Congratulations on the decision to start your own business! Proper planning before launching your business is truly important. If you haven’t already, you’ll need to consider consulting both an attorney and tax adviser to make sure you are starting out on the right foot. Finding advisers you can trust and who are familiar with your projected business activity and personal finances will be very helpful.
The most common types of businesses are sole proprietorship, partnership, C corporation, S Corporation and limited liability company (LLC). Below are some of the key differences between each type:
- A sole proprietorship is the most common and simplest form of business organization. However, a proprietorship can only have one owner. Since there are two owners in your new venture, a proprietorship will not be available in your situation.
- A general partnership involves two or more people who agree to share in the profits or losses of a business. There are many advantages to a business being taxed as a partnership, including the flexibility provided by this type of legal structure. One of the advantages is that a partnership does not bear the tax burden of profits or the benefit of losses because both are “passed through” to partners who include the activity on their individual income tax returns (avoiding double taxation). One of the disadvantages is that each partner is personally liable for the financial obligations of the business.
- A corporation is an entity separate from the founders. A corporation can be taxed, held legally liable for its actions and can make a profit. One of the advantages of forming a corporation is you can avoid personal liability. A disadvantage is that the business profit is taxed to the corporation when earned, and then may be taxed again at the shareholder level if distributed as dividends.
- In an S-Corporation, income, losses and deductions are passed through the business to the shareholder, and it is therefore taxed like a partnership. Electing to be taxed as an S-Corp usually prevents the incidence of double taxation.
- An LLC allows owners to reap many of the benefits of both the corporation and partnership forms of business. One advantage of an LLC is that it benefits from the flexibility available to a partnership. Also, profits and losses can be passed through to owners without taxation of the business itself while owners are shielded from personal liability.
As a business taxpayer, you will need to choose and use a consistent accounting method. An accounting method is basically a set of rules that determine when to report income and expenses. The most common are the cash method and the accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you receive the income or pay the expenses in a future year.
Exceptional record-keeping is critical for the success of your business. Organized, efficient records will help you when it’s time to file your business tax forms at the end of the year. Develop a habit of reviewing your records on a consistent basis in order to monitor your business’ progress and prepare your financial statements.
Consider engaging financial and legal advisers who can help you strategize appropriately depending on your goals and aspirations. If you know where you are and where you want to be, talking to experts, professionals and other business owners will arm you with valuable knowledge and new relationships that can ultimately help your business succeed.
Crystal Faulkner is Cincinnati market leader with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. Tom Cooney is with Wealth Dimensions, an investment advisory firm. For additional information, call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise,” a morning and afternoon radio show that profiles highly successful people, companies, organizations and issues throughout our region.
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