The new business owner should consider several factors when opening up a new business or purchasing an existing business. Personal liability potential and how to reduce it, potential income tax savings initially and long term and the accounting system needed to properly reflect income and manage the business.
Liability potential will be assessed based on the type of product or service to be provided, probability and magnitude of error and number of employees.
The owner's personal net worth, partners, if any, should be considered.
If more than one owner is involved, martial status of the owners could be a serious problem due to death or divorce. Some of the risks can be mitigated with the purchase of liability insurance. Other insurance such as workman's comp, key man life and property/casualty may be appropriate under the right conditions.
The first year of a new business offers many income tax savings opportunities. These will vary with the choice of entity and other income of the owner/spouse. For example, tax rates for a sole proprietorship (or single member LLC) will be different than tax rates for a corporation. Self-employment tax could be as much as an extra 15.3% added to the income tax rate. Many new owners fail to take this into consideration with their tax estimates. Depending on the legal classification, the owner will have the option to elect with the first tax return how the business will be taxed. Single member LLC, partnership, C corporation, S corporation are just a few. Matters can be complicated with specialty organizations such as PA, LLP, PLLP, PLLC. The final choice will determine whether the owner withholds income and payroll taxes or pays quarterly estimated taxes to the IRS.
The method used for revenue recognition will vary depending on the type of business, the amount of revenue per year and the entity choice. Cash versus accrual; inventory capitalized or expensed; percentage of completion or completed contract are some of the possibilities. The answers to these questions then influences the choice of accounting software. An accounting system can be as simple as a checkbook referenced to invoices, up to QuickBooks and further into specialized industry systems. The particular method would also determine the personnel skill, experience and cost required to keep the books.
As you can see there are many questions and options to be decided long before the doors open and the critical issues related to running the business start up or new purchase.
Setting up the correct business entity is crucial to the success of a start up business. Download a Special Report on 'Five Deductions That Can Lower Your Income Taxes' by visiting Startup Business Entities to get started right away.
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