Launching a new business is an exciting time for an entrepreneur. However, at Bookkeeper Express, as a leading provider of DIY bookkeeping and Quickbooks, we know starting a company requires careful strategy and planning. The planning begins with one question for many business owners: “Should I be a sole proprietor, an LLC, or Incorporated?”
Sole Proprietor or LLC: Which One is Right for Your Business?
The Bookkeeping Express team of financial professionals develop customized and flexible virtual accounting and payroll solutions for our clients. However, we are not attorneys. We can’t tell you all the legal benefits of doing business as a Limited Liability Corporation (LLC). However, there are several tax benefits to consider. We can guide you through the process of setting up your LLC with your state, applying for a tax identification number for your LLC with the IRS, and making the necessary tax elections with the IRS.
A Breakdown of Limited Liability Corporations
Your Limited Liability Company (LLC) is established with your state. Most states allow you to file the LLC Articles of Organization online. Once the state authorizes your LLC filing, your next step is to apply for a tax identification number, often referred to as an EIN. However, before applying for your EIN, you need to make a few tax decisions.
The IRS does not recognize LLCs. There is no tax form for LLCs. Instead, the IRS will ask you how many LLC members (aka owners) are in your LLC. If there is only one member, the IRS will automatically default your LLC to be taxed as a Sole Proprietor and instruct you to file tax form Schedule C. If your business has two or more members, the IRS will automatically default your LLC to be taxed as a Partnership and instruct you to file tax Form 1065.
Certain businesses/industries benefit from filing Form 1065 (like real estate). Still, accepting the IRS defaults will generally cost you much more in tax, which of course, is why the IRS defaults your LLC to the tax types. Both Sole Proprietors and Partnerships are subject not only to Income Tax, but they also are subject to Self-Employment Tax of 15.3%.
Most businesses that sell products or services will want to make an election with the IRS so that the LLC is taxed as an S-Corporation. It’s important to discuss options with your tax advisor (not your friend or neighbor). Every business is unique, and what is good for your neighbor may be detrimental to you from a tax perspective. Discussing your options with an accounting professional can ensure you consider all relevant factors before making any tax elections with the IRS.
Once you have determined what elections you plan to make, you can then complete the IRS Form SS-4 to apply for an EIN. You can also apply online at the IRS.gov website. Be sure to have the SS-4 form already filled out and in front of you if you apply online. The IRS has a time limit on the online application, and the time limit is short — you don’t want to have to keep starting over from scratch while you look for the information the online application will require.
If there is a question on the SS-4 that you are not perfectly clear on, call your tax advisor for direction. Answering the information incorrectly can lock you into something you don’t want or that doesn’t protect your best interests. At the end of the application, you will get one chance and one chance only to print or save the EIN the IRS assigns to your LLC. The Bookkeeper Express team cannot emphasize this point enough: be sure to capture your EIN by printing it and saving it as a PDF.
If you fail to capture your EIN, you will be at the mercy of the IRS to obtain a copy, and it can take 6 to 9 weeks to receive the document. Without your EIN, you cannot make the tax elections you need to make, and you will not be able to open a bank account or apply for a credit card for your business. The EIN is your business’s version of your Social Security number.
After you obtain your EIN, your next two steps can happen simultaneously:
- Make tax elections
- Open a business bank account
Start-Up Funds and Business Expenses: Launch Your Business on the Right Foot
Once your business is official, you must stop paying for business expenses from your personal accounts. Instead, you should “loan” your business the funds that it will need to pay for its costs directly from bank and credit accounts in the business name. From this point forward, you should NEVER pay another business expense with personal funds. Doing so can make your LLC worthless and put you at risk from a legal and tax standpoint.
It is normal and acceptable for you to pay startup expenses from personal funds. Be sure to keep a detailed list of these expenses, who paid them, when it was paid, who was paid, and why they were paid. Always keep receipts. The IRS does not accept bank statements, check images, and credit card statements as proof of what was purchased. You must have the actual receipt or bill for every purchase.
Once your new LLC is set up, your tax advisor will need the list of all start-up expenses. Your tax advisor will report these expenses on your business’s first tax return. You will get credit for it in the form of an equity contribution or as a shareholder loan that the company can pay you back later.
The IRS and the states are very specific about your business’s record keeping. They require you to keep a balanced set of books. It’s essential to get started from day one with an accounting software solution like QuickBooks. If your budget keeps you from hiring a qualified bookkeeper, then at the very least, get help setting up your DIY bookkeeping and accounting software. A good foundation is critical for your house, and it is crucial for your business’s accounting records to set yourself up for success.
Contact Bookkeeper Express Today
Have you started 2021 financial and HR planning for your business? Bookkeeper Express can help. Contact us today to learn more about our DIY bookkeeping and outsourced accounting solutions.