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Bob Cassel

It's Easy to Start a Business of Your Own

by Bob Cassel, EA, CFP® / October 2009 / Tax Planning

Over the years, many of our clients have started small businesses. This may have come about as a result of an offer through the company they worked for, or it may have been the realization of a long-time personal goal.

In any case, our client-entrepreneurs are enjoying the many advantages of owning a business, such as having control over whom they work with; when and how they work; and the way in which they do the work. Here are a few things to think about if you are interested in starting a business.

Choosing the type of business (business entity)

The three most common types of small businesses are: 1) incorporated, 2) a Limited Liability Company (LLC), or 3) a one-person company, also known as a sole proprietorship. The choice can involve many factors, but the easiest entity to set up is the sole proprietorship; usually, it requires minimal state registration and fees. It's also easy to close.

If you plan to have employees1 and/or you will be exposed to lawsuits seeking financial damages, you should consider forming either an LLC or an S Corporation. These entities put a cap on financial damages to the things (assets) the company owns. In other words, your personal assets are not at risk.

Tax considerations

When it comes to taxes, there's good news and not-so-good news. The good news is that everything you spend to conduct business is deductible. Those expenses reduce your taxable income dollar-for-dollar. And filing your taxes only requires a few extra forms that will be attached to your regular income tax returns.

Things like auto expenses, home computers, and home office expenses are deductible for business owners; they weren't when you were an employee. If you hire your children (under age 18), you can pay them up to $10,700 per year tax-free; that strategy alone saves $4,954 in taxes, though you will have to put $5,000 of their earnings into their IRA to make this work.

The bad news is that you will have to pay all of the Social Security tax (also known as the self-employment tax). This adds 7.65 percent to the federal taxes you would have paid as an employee of a company.

Keep receipts

You'll need to keep receipts for all business expenses. Having a separate business checking account isn't required by law, but we recommend it. It sure simplifies record-keeping. All money going into a separate checking account would normally be revenue, and most all of the money going out is an expense.2

A spreadsheet or a home accounting program like Quicken will help you get organized. If BWFA is doing your tax return, we'll need a report of your income and how much you spent for each expense category, including subtotals.

Mileage log. You'll need to keep a log of your business miles. Write down the date, place of origin, and destination, purpose of the trip (example: business meeting), and the round-trip mileage. On New Year's Day of each year, write down your car's odometer reading.

Office-in-home. If you own your own business, you'll need a space to work. Many people use an area in their home. This makes the business percentage (normally around 8 percent) of some home-related expenses deductible. These include mortgage, insurance, utilities, and repairs.3

Plan Ahead

Starting a business can be a great experience. But it can be complicated. If you are thinking about starting a business full-time or even as a sideline venture, we recommend that you meet with us in advance. We can help you with basic decisions and even help with certain registration requirements. Of course, we can advise you on the tax issues as well.

1Please exclude your spouse and children from this definition of employees.
2Not all money coming in is necessarily income. Example: you may put some of your own money into the business to purchase a computer. That money is not income, rather it is a contribution of money to your business. All of the money going out may not be an expense. Example: the money you pay yourself is not technically an expense.
3Deducting the office-in-home expense is not for amateurs. Consult BWFA for help.


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