8 Considerations when Starting a Business by Laurence Bernstein, CPA
Striking out on one’s own and starting a business can yield countless rewards. However, budding entrepreneurs must take the time to plan, in advance, to make their visions a success.
Establish the Business Structure. Entrepreneurs have an array of choices when deciding how to structure their business entities. Whether they choose to form a Corporation, an S Corporation, a Partnership, a Sole Proprietorship or a Limited Liability Company will depend of the nature of their businesses and their own unique circumstances. It is an important decision that has legal and tax implications, and will determine what tax forms businesses must file. Therefore, entrepreneurs should make it a point to meet with legal and financial advisors and seek their professional counsel before electing the most appropriate entity for their new enterprises.
Register the Business. Business owners must understand their responsibilities to register their businesses not only in the states and often local counties where they are based but also with multiple business and professional agencies, depending on their structures and business focus. Similarly, businesses must obtain all federal and state licenses and permits required to operate legally.
Obtain a Federal Employer Identification Number. Businesses must apply for an Employer Identification Number (EIN), also known as a Federal Tax ID number, to recognize the business for federal tax purposes. The EIN will need to be included on all federal tax documents, including annual corporate returns.
Establish Business Processes and Accounting System. Business owners should decide, up-front, how they will maintain their business records going forward. How will the business receive cash from customers and pay vendors? What are its reporting and compliance needs? How will it handle employee payroll and benefits? Organization and accuracy are key and will require a significant investment of time. Cloud-based software solutions, such as QuickBooks Online and Bill.com, help business owners reduce these time commitments by automating financial record-keeping and accounts payable processes. They simplify data entry, organize data into easily identifiable categories, keep track of expenses, create invoices and manage accounts receivable and payables.
Select an Appropriate Accounting Method. Business owners must decide on and remain consistent in how they will account for income and expenses. The two most common methods are the cash and the accrual methods of accounting. In the simplest terms, businesses employing the cash method will report income in the year they receive payments and deduct expenses in the year they make payments. Under the accrual method, businesses will recognize income and expenses when underlying transactions occurs rather than when cash changes hand. For example, income will be recognized at the time an order is placed or a service is performed, and expenses will be deducted when an invoice is issued.
Prepare an Operating Agreement or Corporate by-Laws and Shareholder Agreement. An operating agreement is a contract between the members of a Limited Liability Company (LLC) that governs the LLC’s operations and its members’ financial and managerial rights and duties. It is similar in function to corporate by-laws, or analogous to a partnership agreement in multi-member LLC’s. Corporate by-laws set the rules and regulations for operating the corporation. A shareholder agreement is an optional document that a corporation’s shareholders may use to create certain rights and obligations among themselves. These agreements include important decisions that are much easier to make while a business is getting started, rather than when a dispute arises years down the road. For example, the documents may outline how the business will be taxed and how it will distribute cash and profits. They may also include a buy-sell provision that states what happens when one of the owners can no longer participate in the business due to death, disability, bankruptcy or other situation.
Know your Tax Responsibilities. Businesses have a multitude of tax responsibilities, including income tax, self-employment tax, excise tax, payroll tax, and sales and use tax, as well as an equally diverse range of information reporting requirements. By understanding these responsibilities, business owners can prepare to comply with them and develop a plan for staying on track.
Be Prepared to Comply with the Affordable Care Act. Businesses with at least 50 full-time employees are required to offer their workers and dependents minimum essential, affordable health care coverage or be prepared to make a shared responsibility payment to the IRS. Smaller businesses may apply for a Small Business Health Care Tax Credit equal to 50 percent of premiums paid for small business employers or 35 percent of premiums paid for tax-exempt employers with fewer than 25 full-time and part-time employees. Regardless of their size, all employers are required to comply with the information reporting responsibilities under the health care law.
Starting a business is an exciting endeavor that should be approached under the guidance of experienced accounting and legal professionals. The advisors and accountants with Berkowitz Pollack Brant have more than 35 years of experience helping businesses establish themselves, manage risks and maximize growth opportunities.
About the Author: Laurence Bernstein, CPA, is a senior manager in the Tax Services practice of Berkowitz Pollack Brant, where he provides tax and consulting service to entrepreneurs and privately held business owners. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.