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Starting a Business
Added on 10/7/04
C
ongratulations! If you’re starting a business of your own, you’re beginning an exciting adventure. Naturally, you want your business to make a profit and provide you with a a good income. With careful planning and attention to detail, it will. But there are things you must know about going starting a business .... a few essentials to get going in the right direction. Some are legal requirements. Others .. just good business.HOW IS THE BUSINESS ORGANIZED?
Each kind of business structure has it’s own advantages. An attorney or qualified counselor can help you decide which of these is best for you.
Sole Proprietor
One person is the owner
The owner is the boss, responsible for all debts and liabilities: he or she receives all the profits.
Profits are taxed as personal income.
Operation is simple; the business is easy to start and dissolve.
Partnership
May have two or more owners.
Each partner is liable for the actions of every other partner.
The business itself isn’t taxed directly, but an information tax return must be filed with the profit and loss allocated to each partner.
A written agreement prepared by an attorney and spelling out the details is strongly recommended.
Corporation
A corporation is a separate legal entity, formed by one or more people.
Articles of incorporation must be filed with the state. Each state has its own rules for incorporating.
Stock is issued in exchange for money or other valuable consideration. The amount of stock held determines the percentage of ownership of each investor.
Liability for debts usually is the company’s not the owner’s.
Both the company and the owners pay income tax, but the corporation can claim expenses not allowed to sole proprietors or partnerships.
Charter restrictions may limit what the company and it’s owners can do.
There are different kinds of corporations, so professional business counseling is important to determine which is most favorable to your situation.
WHAT BUSINESS LICENSES
DO YOU NEED?
Licensing requirements depend on the kind of
state, county and city authorities for the requirements. Business licenses are not required for some businesses located in County areas. However, every business must file a fictitious name statement unless they are a sole proprietorship using the owner’s name (i.e. Mary Jones Crafts).
EVEN SMALL BUSINESSES
ARE REGULATED
The types of applicable regulations vary greatly from one type of business to another. But one thing is sure, you need to know about regulations before you accidentlally break one.
Typical local and federal regulations you should check are:
Consumer Protection Regulations
Consumer Credit Protection Act applies if you extend credit ot customers.
Other federal legislation such as the Flammable Fabrics Act and the Food Drug and Cosmetic Act may strongly affect your business.
Environment Protection Regulations
Check which local, state, and federal pollution laws apply to your kind of business.
Laws Encourating Competition
These rules prohibit certain types of business activities in restraint of trade, price discrimination, false advertising, misrepresentation and disparagement of competitors. They change fairly frequently.
Labor Relation Laws
If you have employees, you must comply with federal and state regulations covering wages, hours, working conditions, record-keeping and discrimination in hiring.
Economic Security Legislation
Involuntary unemployment benefits are required by state and federal legislation.
Provisions vary from state to state, but may include rules to minimize losses employees might have from industrial accidents and occupational diseases, to provide medical care for employee income after retirement.
Employer Identification Number
A federal employer identification number (EIN) is required of all businesses except sole proprietorships with no employees.
Ask your local Internal Revenue Service office or our office for form SS-4 to apply.
For information of federal tax regulations, also ask the IRS for the following booklets: Employer’s Tax Guide (circular E), Tax Guide for Small Business and the Businessman’s Kit.
If you will have payroll you also need apply for a Pennsylvania Withholding Booklet. Use form PA-100 to apply.
If you are purchasing an existing business, do not use the employer identification number (EIN) of the former owner. In addition, if you had a prior EIN for another business, do not use the EIN from the former business.
BE PREPARED FOR TAXES
Every business pays a number of taxes - local, state and federal. A business counselor can help you determine which ones apply to you. Here’s a sample of the type you may be required to pay:
Corporation and Individual Income Tax
Estimated taxes (like withholding from your pay (checks) must be paid based on your profits throughout the year.
Sales and Use Tax
These are state-required taxes to be charged to the customer on the purchase of taxable items. In Pennsylvania obtain a Retailers Information Booklet on State and Local Use and Sales Tax.
Self Employment Tax
Sole proprietors are responsible for paying their own social security taxes.
PAYROLL
If you will have employees, a payroll journal should be maintained. Each employee’s name, address and social security number as well as forms W-4 and I-9 must be maintained on each employee. The journal should a
withholding amounts by category. The IRS Circular E is available to assist businesses with payroll issues such as withholding amounts and payroll deposit deadlines. You are required to provide to each employee, each pay day, a check stub which shows employee name, social security number, gross wages, withholding amounts and net pay.
Some of the taxes you will need to become familiar with are:
Social Security (FICA)
Shared by the employer and employee. You must withhold the employee’s portion from company funds.
Federal Unemployment Tax (FUTA) and State Unemployment (SUTA)
Unemployment tax is required to be paid in every state and to the federal government. This is paid from the employers funds.
State Disability Insurance (SDI)
Withheld from the employee’s pay check.
Federal and State Income Tax Withholding
Tax payments withheld from each employees pay check based on their W-4 form.
Workman’s Compensation Insurance
If you have one or more employees, worker’s compensation insurance is mandatory.
THE IMPORTANCE OF RECORD-KEEPING
The U.S. Small Business Administration states that poor record-keeping is a major cause of small business failure. Successful business owners find the services of an accountant essential in this area.
The federal government requires that every business keep certain records. You need a record-keeping system which provides:
- Sales income records.
- Cash records.
- Credit records.
- Personnel records.
- Fixtures and property records.
- Expense records by category.
- Employee wages and hours by pay period.
- Records of monthly, quarterly or annual tax pay ments and forms filed.
- Substantiation of income tax data.
Setting Up the Books is a must for any business.
However, depending on the size
and complexity of the business, the complexity of the business, the complexity
of the record-keeping system any vary. For example, a taxpayer just starting a
business may choose to use a single-entry bookkeeping system based on cash
receipts and produce a monthly synopsis of income and dispersements. As a
business grows, a double-entry system is probably a good idea. This is more
complicated because it is based not only on the profit and loss statement but
the balance sheet (accounting of assets, liabilities and owner’s equity) as
well. Journals and ledgers must be maintained in the double-entry system.
Record keeping: A business should keep all business receipts. To make tracking of businesses transactions easier, it’s best to maintain a separate bank account for the business and to pay all business expenses by check. If expenses are paid with cash, you should keep a cash register receipt for the record. If petty cash fund is maintained, documentation should be maintained to show how the funds were spent. To maintain order in the system, accounts should hold be classified by category, and receipts filed according to category.
Helpful supporting evidence: sales slips, invoices, cancelled checks, paid bills, duplicate deposit slips. Effective records should document the sources of income - this helps identify an income item as taxable or nontaxable. A simple notation in a check register is enough to trace where income was derived and can prove invaluable if a taxpayer is audited and the IRS performs a bank statement analysis.
ARE YOU INSURED?
To protect your investment of time and money, your business should be adequately insured, especially for uncontrollable risks. You should consider your needs for these types of insurance:
- General liability.
- Automobile liability and physical damage.
- Theft and vandalism.
- Business interruption.
- Group life, health and disability.
DO YOU NEED A BUSINESS COUNSELOR?
A business counselor who specializes in small and medium business record keeping systems in probably the best person to consult in setting up your business. The fees are tax deductible, and the savings you obtain from more efficient operation of business will help make profits. Your tax firm can provide the record keeping systems, services and advise your business needs to succeed. Our office has expertise in local, state, and federal regulations. Like you, we are independent business owners and have the experience and knowledge to help solve the financial problems facing every business owner.
For business counseling, record-keeping systems, income tax preparation, the latest information on tax developments, and for year-round tax advisory service, look to your local tax accounting firm for the answers to your business problems.