When making the transition from working for someone else to working for yourself, the things that may get overlooked the most are the details, particularly the details needed to ensure the financial stability of your business moving forward. You want to make sure you have a strong financial foundation from the start. With that in mind, here are some ideas and mistakes to avoid as your business gets off the ground. At the end of the day, these items should not deter you from going out on your own or have an impact your skill set. Remember, only you can make your business thrive.
Define your business
Your business will soon start to generate revenue. However, it is important to remember that your business creating revenue is different than you, the individual, making money. Therefore, you will need to define your business structure and name. The options for this include Sole Proprietorship, Partnership, Limited Liability Company (LLC), S Corp, and C Corp. When making this choice, you need to consider the following:
— How many people are involved in the business? – Only you? You and your spouse? A Partner? Investors?
— Based on your revenue, which structure will be the most efficient for taxes? – Do you sell products or services? Depending on the accounting and tax method you use, there could be a preferred business structure.
— What structure will easily lend itself to company growth / expansion? – Namely adding partners, a board, employees, things to be discussed further later.
You can set up your business by filing out the necessary forms and paying a fee.
Keep it separate
Once your business is set up, business and personal transactions need to stay separate. To accomplish this, you will need a business bank account to hold all business revenue received. It will also help to maintain all receipts from business expenses and keep them separate from the receipts you receive for personal items. For instance, whenever you make a Target run you will need to have the clerk ring you out twice: once for office supplies and a second time for the household toiletries you just bought.
Know when to hire help
When is the right time to hire an accountant or CPA? If your income is W2, services like Credit Karma or Turbo Tax can easily help you manage your affairs. When you have both W2 and 1099 income, or only 1099 income, it could be helpful to hire an accountant or CPA for the following reasons:
— This individual can run comparisons on the deductions and expenses that will be better for you to take.
— This individual will have a superior knowledge of the tax code (even changes) as well as what write offs you can and cannot take.
— This individual can sign off on your return
You’re making a profit and the IRS knows
It is common for a business to not make a profit in the beginning. Even if cash flow is positive, based on the expenses in the first few years, it’s possible that net income is 0. However, as your business begins to make money, you will want to begin taking extra deductions (and you’ll want to save this money). W2 employees should be familiar with a 401/403b, which are both retirement plans offered by the employer where the employee can put money away pre-tax. Under these plans, the employee receives a tax deduction today while the money is invested, and grows tax deferred. As a business owner, you may be able to set up a similarly functioning account using the following options:
— SIMPLIFIED EMPLOYEE PENSION (SEP IRA)
— SAVINGS INCENTIVE MATCH PLAN for EMPLOYEES (SIMPLE IRA)
— Solo K
As with other decisions, the best strategy depends on business structure, accounting and tax method, and goals for company growth. Conversation with an accountant and financial advisor can help guide this decision.
Cautiously and cost effectively grow the team
As your business starts taking off, be aware of how to most efficiently use your time. No one can do what you do for your business, but someone else can do the paperwork, or manage your calendar, or order supplies. As your company grows, the team working for you will naturally need to grow as well. Be sure you know when to make this choice. Additionally, as you bring on more individuals, you will probably want to ensure that your company is a competitive employer in the marketplace, which means offering insurance benefits and retirement plans to your future employees. Also keep in mind that when making these decisions, it may help to ask for assistance from experts in these fields.
Kristin Thompson, is a CFP ® with Renaissance Financial Corporation. The driving force behind Kristin’s excellent service to her clients is strong relationships. Together, they create a strategy that reflects each individual’s unique goals and dreams, while helping to relieve the stress and anxiety that often surrounds money. She works with a diverse group of clients, but especially enjoys guiding women in their financial journey, helping them learn how to manage, save, invest and protect their money.
Kristin grew up in St. Louis, Missouri and is proud to still call St. Louis home. She stays active in her community. She also serves on the Board of Directors for Wyman Center, which allows her to inspire the next generation and help them stay on track for success.
Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation. Registered Representative and Investment Advisor Representative, Securian Financial Services, Inc. Securities and investment advisory services offered through Securian Financial Services, Inc. Member FINRA/SIPC. Renaissance Financial is independently owned and operated. 5700 Oakland Avenue, Ste. 400, St. Louis, MO 63110. 2081690 DOFU 04/2018