Did the allure of launching a startup make its way to your 2012 “this year I am going to finally do it” plan? Have you been putting together your business plan and feel the pulse of your entrepreneurial spirit quicken as you get closer to Day One of launching?
Unfortunately along with the excitement of starting your own business comes the reality of the tax code and making sure that you establish a strong financial foundation. John Stanfield of Stanfield & Associates, a Chicago-based CPA firm that specializes in startups, shared the following 5 tips – all great to think about but in no way intended to replace legal representation or tax consultation.
1. Know which tax entity is right for you and the implications of each one
A tax attorney or your legal advisor will provide counsel on whether a sole proprietorship, partnership, or corporation (C-Corp of S-Corp) is better for your particular situation.
2. Understand your tax liability, and plan for it
No matter where your company is incorporated, you are still responsible for paying taxes in the state that you operate in.
3. Draw up a Shareholder or Operating Agreement
It needs to detail decision-making power and tax elections and outlines how new owners can buy in and existing owners can sell. For example, what happens if you have a partner and he/she gets a divorce? What happens if your business partner wants to sell and you don’t? The Shareholder or Operating Agreement is the most important document you have when starting your business no matter how close the relationship between you and your partners.
4. Open a separate business bank account even if you are bootstrapping
Don’t pay your mortgage from the business, don’t pay your personal utilities, and don’t pay your personal credit cards. Take some kind of distribution from the business (a draw or salary depending on how your business is set up) in the form of a business check, deposit it to your personal account, and then pay your personal bills. This is imperative for tax filing and determining your liability.
5. Loans from owners to the business must be memorialized
The rate is dependent on the length of the loan, but the IRS publishes minimum rates monthly that you should follow. If you do not, the IRS may say that you made a contribution to capital instead of a loan, which could produce a totally different tax effect to the owner who made the loan.
Editor’s Note: We are thankful to John Stanfield of Stanfield & Associates for his five tax tips mentioned in this article. While we are on the topic we have to mention that Frost, Ruttenberg and Rothblatt P.C. (FR&R) a Chicago-based firm is a Tech Cocktail partner that provides a full range services including tax consulting, accounting, and consulting services to us. You may want to check them out if you are in need of accounting services and tell them we sent you.