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Your Taxes: Starting your own business

Michele Knight, CPA

So, you’ve got a great idea or great skills and you decide to go out of your own and become an independent contractor or open your own company. But, where do you start? Small businesses come in many shapes and sizes, but all fit into one of a few formation categories. The basic formations are sole proprietorship, partnership, limited liability company and corporation. Of course, within these categories there are dozens of variations, but let’s start with the big four.Sole proprietorships are owned by one person and have few legal requirements to operate. The owner retains full control of management and operations; however they are subject to unlimited liability in the case of a lawsuit. Partnerships are similar; however ownership and control remain in two or more partners’ hands, rather than one individual. What does it mean to have unlimited liability? It means that if your business or one of its employees screws up, both your business and you, personally, can be sued. Limited liability companies are relatively new, but very popular in Colorado. There are more upfront costs than a sole proprietorship or partnership, including filing fees with the state and creation of an operating agreement. All too often, I see people who think they can just go online and quickly form a limited liability company at the Colorado Secretary of State website, but this is not the case. There are several other steps that need to be taken, and you should consult your attorney or CPA when starting a new business. One mistake can be more expensive to fix then what you would’ve paid to hire professional help in the first place! As long as the LLC is properly setup and maintained, then if the LLC is sued, personal assets cannot be thrown into the lawsuit, only the assets held in the name of the LLC. LLC’s don’t actually offer tax benefits to its owners, but the liability protection is worth the extra hassle.But, in order to keep your LLC protected, you have to be very careful to keep your legal and accounting ducks in a row. You should ask your attorney about the legal requirements, but from an accounting perspective, it’s critical you treat the LLC as a separate entity. The best way to think of this in your mind is to pretend you are an employee of your company … just like Bill Gates does not get to use Microsoft’s credit card to purchase his groceries. And, vice versa, you shouldn’t be paying business expenses out of your personal checkbook; the business should pay its own expenses. In order to do this, you need to maintain a checking account and credit/debit card for both your personal life and your business – you cannot combine them.Corporations are the most complicated formation, but offer the most tax benefits and protection to shareholders. Corporations must be filed with the state, and also issue shares of stock to prove ownership. Fees to set up corporations range from $99 to the thousands, and annual operating requirement include annual meetings and specific annual reporting, but unlike LLCs, they offer specific tax benefits to the owners. Corporations are formed as either S Corporations or C Corporations, and the two offer very different tax savings which you should research in detail before choosing one or the other. And, as described in a previous article, the primary benefit of an S Corporation’s ability to avoid paying 15.3 percent Social Security and Medicare tax on profits distributed to owners is very likely to disappear by next year, so this decision is becoming increasingly complex.Which one is right for you? I’m sure you’re not shocked to hear the answer “it depends.” While the internet makes a great amount of information available at your fingertips, it’s always best to consult a professional advisor when making such an important decision for your company. Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. Please visit http://www.cpamichele.com for tax tricks & tips, including a blog to keep you up to date on the ever-changing tax world. Always remember, this advice is not all-inclusive, and you should consult with your tax advisor regarding your personal situation.


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