How should I structure my business

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Structuring your company is one of the first and most impactful decisions you will make when starting your business. But, deciding the best business structure for small business can be a challenge.

Before you randomly pick a business structure out of a hat, get to know how each type of entity can affect your small company. Gather all the information about business entities before deciding on the best business structure for your startup.

You have a few choices when deciding on your business entity. According to the IRS, there are five business structures to choose from:

• Sole proprietorship
• Partnership (general, limited, or limited liability partnerships)
• Limited Liability Company (single-member or multi-member LLC)
• Corporation
• S Corporation

The structure you select impacts everything from your tax liability to your personal liability. You must choose a structure before you can register your business.

Not every aspiring entrepreneur can afford to bootstrap their business. You may need to think about financing options if you want your small business idea to come to life.

If you are interested in borrowing funds, you can apply for a business line of credit, credit card, Small Business Administration loan, or general bank loan. You may need to offer collateral to secure loans.

If you want investors to invest in your business, you likely need to offer them business equity or control in your company. You can seek funding from venture capitalists or angel investors for small business.

Another popular financing option is to crowdfund. Crowdfunding is a financing method where you ask for investments or donations, generally from a large group of people. Keep in mind that you probably need to offer an incentive if you want crowdfunding to be effective.

Asking friends and family for loans or investments is another popular financing option for small businesses. Treat funds from family and friends seriously by creating a contract and payment plan.  

Unless your business is a separate legal entity or operates under a “doing business as” name, you don’t have to open a separate business bank account. But, separating your personal and business funds is a wise decision, even if you are not required to do so.

Mixing personal and business funds can cause you to file taxes inaccurately, become disorganized, and overspend. You may accidentally use business funds to make personal purchases if you combine funds.

Opening a business bank account is a straightforward process: choose a bank, gather necessary documents, and open the account. 

Not every aspiring entrepreneur can afford to bootstrap their business. You may need to think about financing options if you want your small business idea to come to life.

If you are interested in borrowing funds, you can apply for a business line of credit, credit card, Small Business Administration loan, or general bank loan. You may need to offer collateral to secure loans.

If you want investors to invest in your business, you likely need to offer them business equity or control in your company. You can seek funding from venture capitalists or angel investors for small business.

Another popular financing option is to crowdfund. Crowdfunding is a financing method where you ask for investments or donations, generally from a large group of people. Keep in mind that you probably need to offer an incentive if you want crowdfunding to be effective.

Asking friends and family for loans or investments is another popular financing option for small businesses. Treat funds from family and friends seriously by creating a contract and payment plan. 

How much accounting lingo do you know? If you do not have all the terms memorized, don’t worry about breaking out the flashcards. Instead, familiarize yourself with a few key terms to get started:

• Cost of goods sold (COGS): An expense that represents how much it costs you to produce your offerings. COGS is a crucial factor when determining your      business’s profit.
• Inventory: Includes the raw materials in storage, items in the production process, and finished goods available for sale.
• Assets: Your business’s physical (tangible) or non-physical (intangible) property that adds value to your business. You can have current assets which can convert into cash within one year. And, you can have fixed assets that do      not convert quickly into cash.
• Liabilities: Money that your business owes. You can have both short-term liabilities that are due within one year and long-term liabilities that are not due within one year.
• Equity: Your business value after subtracting liabilities from assets.
• Revenue: The amount of money your business brings in from sales.  

One of the first decisions you need to make when setting up your books is deciding how you will record transactions.

You can record transactions by hand, hire an accountant, or use accounting software.

Recording transactions by hand is the most inexpensive and time-consuming method. You open up your business to making common accounting errors, such as miscalculating or failing to balance accounts.

Hiring an accountant is the most expensive but least time-consuming method. When you hire an accountant, you do not need to manage your books. You may hire an in-house accountant or outsource to an accounting company.

Lastly, you can opt for an accounting software provider to manage your books. Using software lets you track incoming and outgoing money and organize your books. With software, you can automate your recordkeeping responsibilities, then hand over your books to an accountant for the more complicated accounting requirements, such as tax preparation.   

When transactions take place, you increase one account and decrease another account in your books to reflect the transaction. The purpose of “debiting” and “crediting” accounts is to increase one account and decrease the other.

Debits increase asset and expense accounts. And debits decrease liability, equity, and revenue accounts. Credits do just the opposite.

Credits increase liability, equity, and revenue accounts. And they decrease asset and expense accounts.

Debits and credits are the basis of double-entry bookkeeping, but they can be difficult to grasp, let alone memorize. Take a look at this chart to help you sort debits and credits.    

You will deal with accounts payable and receivable.

Accounts payable is the money you owe to vendors, or a liability. Record accounts payable when you purchase something without paying right away.

Accounts receivable is money owed to your business, or an asset. Record accounts receivable in your books when customers purchase something on credit.    

You can file your business tax return with your Taxpayer Identification Number (TIN), financial records, and the proper tax return form. The form you file depends on how you structured your business.

Sole proprietors attach Schedule C, Profit or Loss from Business, to Form 1040 to file their small business tax return.

Partnerships must file Form 1065, U.S. Return of Partnership Income. The partnership must also submit a copy of Schedule K-1 (Form 1065) to the IRS and distribute Schedule K-1 to each partner.

Corporations use Form 1120, U.S. Corporation Income Tax Return, to file taxes. S corporations file taxes using Form 1120S, U.S. Income Tax Return for an S Corporation.

The tax forms for LLC depends on how you are taxed. LLCs can be taxed as sole proprietorships, partnerships, or corporations.     

The IRS lets you claim tax deductions to lower your small business owner tax liability. Popular tax deductions include home office, self-employment tax, car, business loan interest, and bad debt deductions.     

An audit is an examination of your business’s financial records. During an IRS audit, the IRS reviews your records and checks for inconsistencies in your books.

Sometimes, the IRS randomly chooses businesses to audits. Or, the IRS can audit you if your small business tax returns look suspicious.

To decrease the chances of your business getting audited, you need to avoid IRS audit triggers such as running a cash-only business, making errors on IRS forms, missing tax deadlines, and claiming too many business expenses.     

To determine your business’s financial health, you need to know how to calculate profit. Use the following formula to find net profit:

Net Profit = Revenue – Cost of Goods Sold – Expenses     

You can report your business’s profit by creating an income statement. Your small business income statement summarizes your business’s profits and losses during an accounting period.

The income statement is divided into three main sections: revenues, expenses, and profit or loss. List revenue, COGS, and expenses on your income statement. Then, calculate your net profit or loss.

An income statement is one of three main financial statements you can create to observe your business’s financial health, obtain outside financing, and make financial decisions. The other two financial statements include the small business balance sheet and cash flow statement.      

There is no short answer to this question. You should keep tax returns at least 3 years (That is the General Rule), but the answer depends on the type of document and the type of transactions you have been engaged in. 

The IRS can go back 6 years if a return omits more than 25% of income. If fraud is proven, there is no limit.

If you own Real Estate, hold on to the records that establish the basis of the property. Retain the files until at least at least three years after you dispose of the property.  Same goes for Sales of Securities (mutual funds, stocks, and the like).

Businesses should keep payroll tax records for a minimum of 4 years after the due date for the employees to file their income tax returns. This means W-4’s forms, payroll returns and amounts and dates of tax deposits.

Businesses should keep copies of worker health coverage forms at least 3 years after the deadline for filing.

Records on costs of assets, depreciation, etc. should be retained for decades.       

The IRS issues employee identification number (EIN) numbers. This 9-digit number is used on federal and state tax filings for businesses, including payroll tax reporting documents. You can apply for an EIN through IRS.gov.

The EIN number can be used for a variety of business entities, including sole proprietorships, S corporations and C corporations. Assume, for example, that you operate a C corporation, Ganz Manufacturing. Your corporation can operate under more than one fictitious name, and you can use the same EIN number. Ganz Furniture and Ganz Tool and Die, for example, could be fictitious names used by the same corporation.

This policy simplifies the tax filing process. You will need to register your fictitious names in the state where your business is headquartered.    

Employers use Form I-9 to verify the identity and employment authorization of individuals. Every U.S. employer must have a completed Form I-9 for each worker hired, whether or not the individual is a U.S. citizen. To complete the form, an employee provides documents as evidence of their identity, such as a driver’s license, birth certificate, or passport.

An employer must retain each Form I-9 for a specific period of time, and a state or federal government official may ask to inspect the forms. Government agencies review I-9 forms to verify that each employee is authorized to work in the U.S.    

Each worker completes IRS Form W-4 to indicate the amount of tax withheld from gross pay for federal income taxes. Employees complete similar forms for state income tax withholding. 

Once a W-4 is completed, the employer uses IRS guidelines to calculate the dollar amount of federal income taxes withheld. Each state has similar guidelines to calculate state tax withholdings. It is important to follow all federal and state laws in order to be payroll compliant.

The payment schedules are published in IRS Publication 15.

In addition to withholding taxes, employers may also withhold the worker’s share of payments for insurance premiums, retirement plan investments, and other benefits. The worker decides on the amounts withheld for the payments. Once these payments are withheld from gross pay, the employer forwards the payments to each third party (insurance company, investment firm, etc.).

W-2 and 1099 forms are issued for different reasons. A W-2 is issued to an employee to report gross wages earned, tax withholdings, and other withholdings from gross pay. If you have wages withheld to pay for insurance premiums or to fund a retirement plan, those amounts are reported on a W-2.

The IRS requires employers to mail W-2 forms to workers no later than January 31st of the year following the end of the tax year. So, 2017 W-2s must be mailed by January 31st of 2018.

If your firm has paid at least $600 to a vendor for a product or service, you must issue a 1099-MISC form to that vendor. Freelance workers are considered vendors and are issued a 1099-MISC form. The IRS also requires employers to mail 1099-MISC forms to vendors no later than January 31st of the year following the end of the tax year. The employer combines all of the 1099 issued and reports them to the IRS on Form 1096.