Starting a new business and being self-employed means you are the boss. You oversee your business and oversee earning a paycheck. There are loads of perks that come along with starting a business, such as unlimited vacation time to jet away somewhere amazing and the ability to work in your PJs.
However, starting a new business also comes with some big money decisions, such as picking the right type of business structure, creating a business budget, getting a good team in place — and don’t forget about paying your taxes.
Pick Your Business Structure
Starting a new business means that you need to decide what kind of business structure you will have. There are lots of options, depending on the nature of your business, your revenue and expenses. It’s always a good idea to hire a CPA or accountant before you select your business structure. A CPA or accountant can give you guidance that is specific to your business and your lifestyle.
Some common business structures include:
This is the easiest and most cost-effective business structure when you are starting a new business because there is no formal business structure. Instead, you are filing a Schedule C business form with your taxes where you report your income and expenses for the year.
Most larger corporations fall under this category. This is a formal business structure where your business has a name and files a separate tax return each year, reporting any business income and expenses.
An S corporation, or Sub-Chapter S, is a formal business structure that is a pass-through entity. In a pass-through entity, the business is not taxed itself. Instead, income is reported on the owner’s personal tax return. An S corporation is a popular business type for many small business owners. There are two ways to receive income: as income that you will pay federal and state income taxes on as well as distributions, which avoid payroll taxation.
An LLC stands for a limited liability corporation and is another type of pass-through entity. An LLC is formed with one or more individuals with a written agreement and all business income; expenses pass through to your individual tax return.
A partnership is a great business structure for anyone who wants to go into business with a family member, friend or business partner. Each partner reports his or her share of profit and losses in the company on a personal tax return.
Create a Business Budget
Starting a new business means you’ve got to get your money in shape. It’s a given that you should have a household budget to keep your money in check. Starting a new business means you also need to create a business budget.
The SBA reports that 30 percent of new businesses fail within the first two years. There will be many new expenses that you did not expect when you start a new business. You will have startup costs, such as marketing, building a website, advertising, office supplies, healthcare and more.
Start by creating a detailed business foundation budget of all the expenses you expect to incur each month. Also, figure out how much income you need to make from the business to keep your head above the water. These are your starting numbers. Keep track of your expenses, and be sure to save your receipts for tax time. Many new businesses utilize software like FreshBooks or Quickbooks to stay organized and within budget.
Get Your Money Team in Place
Every successful business has a strong team of number crunchers. Your money team should be versed in how your business operates and what your unique business needs are.
So, who is on your money team?
- A CPA or accountant that understands your business
- A Certified Financial Planner that can help you plan for your business growth and personal wealth
- A business attorney
- A payroll or HR company. A great option for startups is Gusto, an online HR, payroll and benefits company.
Don’t Forget Taxes
Oh, yes, and then there are taxes. When you start a new business, you are responsible for paying taxes. Whether those taxes come out through payroll or you make quarterly estimated tax payments, there is no way to avoid paying taxes.
Working with a CPA, you can figure out what how much you will likely owe in taxes each year. For new businesses, this is worth the expense. The IRS charges a fee for underpayment of your estimated tax bill, which is typically .5 percent of the amount you owe. Your CPA or accountant can help you create a plan to save for and pay your taxes each year.