An Entrepreneur, an Attorney and a CPA Walk Into a Bar

I love small businesses and do everything I can to support them and help them to hopefully succeed.

Entrepreneurship is recognizing a need, developing a solution, and building a sustainable business.

So, you want to own a business, be your own boss.

What’s the best type of business for you?

AN ENTREPRENEUR, AN ATTORNEY, AND A CPA WALK INTO A BAR

You’ve done your business plan. Identified the necessary skills, products, markets, marketing, effort, resources, investment …

Or, you just wake up one day and decide to start freelancing or start a side hustle. Congratulations, you are now a SOLE PROPRIETOR.

BUSINESS ATTORNEY: You might have licensing and sales tax requirements. 

CPA: From a tax standpoint, you have to do … literally nothing other than keep track of income and expenses. You may not need a separate Employer Identification Number from the IRS unless you hire employees.

Aside from being simple, there are no legal or tax benefits to being a sole proprietor. No separate tax filings are required, but all earnings are subject to income and self-employment taxes.

ENTREPRENEUR: What if I work with someone else?

BUSINESS ATTORNEY: You have a PARTNERSHIP. That’s a fancy word for a sole proprietorship with more than one person. You have a buddy with whom you can split your revenues today and mull over important aspects of the business some day in the future.

The benefits of a partnership are moral support and a good answer to that burning question, “What happens if you get hit by a bus?”

You’ll want a partnership agreement.

CPA: And need a separate EIN, and the partnership will probably be filing a separate pass-through tax return. All earnings are subject to income and self-employment taxes.

BAR FLY: What if your sole proprietorship or partnership messes up and causes damage to someone else? 

INSURANCE AGENT: You better have good liability insurance coverage,

INJURY ATTORNEY, eyes gleaming: And the victim could sue you personally for your personal assets. You know, house, car, dog …

ENTREPRENEUR: So, what can I do to protect against that?

BUSINESS ATTORNEY: Form a LIMITED LIABILITY CORPORATION.

It’s a corporation that helps limit your personal liability for actions taken by the corporation. You will need to file some paperwork with the state and develop an operating agreement, 

CPA: get an EIN, keep separate bank accounts and credit cards for personal and business use.

BOOKKEEPER: I can help you with that.

INJURY ATTORNEY: And DO NOT mix business and personal funds. If you do, get sued, and the business itself isn’t valuable, they would go after your personal assets. If you have mixed the funds, you run a significant risk of losing the protection created by the corporation (LLC).

CPA: You can have a corporation that is either single-member, like a sole proprietorship, or multi-member, like a partnership, but it adds personal protection. Tax filings? Single-member, no separate business return; multi-member, yes. Taxes, all the net income of an LLC is subject to income and self-employment taxes.

ENTERPRENEUR: But that’s a lot of taxes. What else can I do?

CPA: Make an SUBCHAPTER S CORPORATION tax election.

Like an LLC, in fact, it can still be your LLC, but … 

PAYROLL PROVIDER: You pay yourself a reasonable salary as a W-2 employee, subject to FICA taxes.

CPA: Yes, but any remaining net income after wages is only subject to income taxes. The owners save the self-employment taxes on these earnings, about 15%. You will be filing a separate pass-through business tax filing. Distributions of net income must be made in proportion to ownership.

BUSINESS ATTORNEY: AND, you have to hold at least annual meetings. AND maintain a corporate record book. 

INJURY ATTORNEY: AND don’t cross the business/personal line.

TRUST ATTORNEY: AND there are special rules for trusts owing S-corporations.

Silent pause.

ENTREPENEUR: I see why we met in a bar. Another round?

Li Friezen & Grossetta is here as one of your professional partners in helping your small business succeed. Call 520-795-4868 for a consult.