The Foundation of Your Business
Lesson 1 from: The Small Business Simple Guide to FinancesAmy Northard
The Foundation of Your Business
Lesson 1 from: The Small Business Simple Guide to FinancesAmy Northard
Lesson Info
1. The Foundation of Your Business
Lessons
Know Your Worth
1The Foundation of Your Business
09:38 2Creating a Usable Bookkeeping System
05:52 3Taxes
06:45 4Get Paid
05:48 5Small Business Deductions
06:30 6Retirement Contributions
06:12 7Income Statements
05:26Balance Sheet
05:39The Foundation of Your Business
Lesson Info
The Foundation of Your Business
1 (upbeat music) 2 Hello. 3 Welcome to the first lesson of Know Your Worth. 4 I'm very excited for you to be here. 5 In today's lesson, I'll discuss building a firm foundation 6 for your business by deciding on a business structure. 7 We have two goals we'll accomplish with this lesson. 8 First, we'll make sure that you have a business 9 and not a hobby. 10 Then I'll go through each business structure option with you 11 to help you understand the tax implications of each 12 so that you can choose the one that's best for you. 13 If you haven't done so already, 14 I recommend printing out the lesson guide. 15 All right, let's get going by talking a bit 16 about whether you have a business or a hobby 17 in the eyes of the IRS. 18 I know many of you are here 19 because you have a passion or a side hustle 20 that you're turning into a profitable business, 21 but just because that's what we want 22 doesn't mean the IRS will see it that way. 23 You'll need to make sure your business 24 has ...
the ability to make a profit 25 and that you can show you really intend 26 to make money doing this. 27 If not, the IRS won't consider yours a business, 28 and you won't be able to take business deductions, 29 which means less money stays in your bank account. 30 The main questions to consider are on the screen, 31 but there are more in our lesson. 32 You can pause this video here 33 and read through all the questions 34 to make sure you're right on track. 35 All right, next up, 36 it's time to choose a business structure. 37 I do have a little disclaimer here. 38 Remember that I'm a CPA and not an attorney. 39 I'm coming at this topic from purely a tax perspective. 40 If there's more than one owner of your business, 41 I would recommend contacting a local attorney 42 that specializes in small businesses. 43 Okay. 44 There are four main business structures to consider 45 and each have their own pros and cons. 46 The first one is sole proprietorship. 47 This is the easiest business structure to form 48 because there's just one owner and it's you. 49 This type of business begins when you make your first sale. 50 The biggest pro for a sole proprietorship 51 is that there's not much paperwork involved with the setup. 52 There's actually zero paperwork as far as the IRS goes, 53 but check with your state to see what's required locally. 54 If this feels too easy for you, I promise it's not. 55 You do not have to jump through hoops to create a business. 56 Now, the downside to having a sole proprietorship 57 is that you can be held personally liable 58 for any financial obligations. 59 So if someone sues your business, 60 they could actually come after your home, your car, 61 and personal checking account. 62 As far as taxes go, sole proprietors file a form Schedule C 63 with their personal tax return. 64 We'll talk more about this in lesson three. 65 The second structure you've probably heard a lot about 66 is this single member LLC 67 or single member limited liability company. 68 The biggest pro for an LLC 69 is that you have more protection 70 against your personal liability if your business is sued, 71 but some clients consider it a headache 72 to keep their business 73 and personal purchases separate, 74 which is an absolute must if you have an LLC. 75 To set up an LLC, 76 each state has different requirements, 77 but usually it involves filing paperwork 78 called articles of organization or something similar. 79 You'll also want to look into annual fees 80 prior to setting this up. 81 Some states don't have any annual fees, 82 and some, like California, can have fees up to $800 a year. 83 As far as taxes go, as a single member LLC, 84 you'll be treated the same as a sole proprietor 85 and file your taxes the same way, with a Schedule C. 86 The third structure you might consider is a partnership LLC. 87 This structure has the same pros 88 and cons as a single member LLC, 89 and it's created the exact same way, 90 by registering with your state. 91 The tax filing is different here though 92 because you'll file a Form 1065 partnership return. 93 If you decide to have a partnership, 94 I would definitely recommend 95 working with a small business lawyer 96 to help you set up your partnership agreement. 97 The last structure we're going to discuss 98 is the S corporation. 99 The biggest pro for going with an S corp 100 is that you may save money on taxes 101 since you'll only pay income tax on your business profit 102 instead of self-employment tax 103 and income tax on all the revenue the business brings in. 104 The biggest headache with becoming an S corp 105 is figuring out a reasonable salary to pay yourself. 106 If you aren't netting around $50,000 a year 107 and aren't ready to pay yourself a salary, 108 you may wanna wait before considering the S corp election. 109 Another con to consider is that once you're paying yourself 110 and any other salary, 111 you'll need to set up payroll, 112 which usually runs about $600 a year 113 in payroll software fees. 114 To become an S corp, you first have to be an LLC 115 or a C corporation. 116 Then you'll file an election form 117 with the IRS requesting S corp status for tax purposes. 118 To file taxes, 119 you'll file Form 1120-S, the S corp tax return, 120 which is actually due one month earlier 121 than your personal return. 122 All right, over to you. 123 It's time for you to make a decision 124 about which business structure you'll use to start out. 125 When you've decided, 126 I'll meet you in lesson one, part two. 127 See you there. 128 (upbeat music) 129 Welcome back. 130 Now that you've decided on a business structure, 131 it's time to iron out a few more details involved 132 in building a solid foundation for your business. 133 In this lesson, we'll talk about researching 134 your state's business requirements, 135 creating an employer ID number, 136 setting up a business bank account, 137 and understanding the right way 138 to accept payments from your customers. 139 First, let's talk about how you can research 140 your state's business requirements. 141 Every state has different rules, 142 especially when it comes to things like sales tax 143 and registration requirements. 144 Because of this, you really need to be careful taking advice 145 from people in Facebook groups or online forums. 146 Always start by visiting 147 your state's Department of Revenue page 148 or a Secretary of States page. 149 Many states have getting started guides 150 for small business owners that lay out step-by-step 151 what you need to do to meet requirements in your state. 152 We'll talk about sales tax, one of the trickier topics, 153 in lesson three. 154 Also, one thing I wanna mention, 155 if you ever need clarification 156 on a state tax situation or application, 157 don't be scared to just give them a call. 158 The next thing you'll want to think about 159 is creating an employer ID number. 160 The only people who won't need an employer ID number 161 or EIN are sole proprietors 162 who don't plan to hire employees or contractors, 163 and don't plan to make sales of services over $600 164 to another business owner. 165 Any other business structure 166 will definitely want to sign up for an EIN. 167 You can go to irs.gov 168 and create a free EIN in just minutes. 169 Make sure that you don't use a website 170 that asks you to pay to create an EIN. 171 Some may be scams and you can get the same result for free 172 by using the IRS website. 173 The next topic we need to discuss 174 is setting up a separate business bank account. 175 Usually bank accounts are free or have a low monthly cost. 176 Having a separate business bank account 177 will save you so many headaches 178 because you won't have to sift through personal 179 and business purchases when doing your bookkeeping. 180 This is a must. 181 Here's a pro tip for you. 182 Call your bank before heading that way 183 to ask exactly what documents, IDs, 184 and numbers you may need to have with you. 185 All right, the last order of business in today's lesson 186 is understanding why you should not be using Venmo 187 or PayPal friends and family. 188 Notice, I didn't say whether or not you should, 189 but that you definitely should not. 190 I know that using them seems like an easy way to avoid fees, 191 but it's not worth the risks. 192 Both of these services have terms of service 193 that clearly states they should not be used for business. 194 If you do, your account could be locked 195 for violating those terms. 196 These services could also lead you 197 to be the victim of a scam. 198 If you're using a bookkeeping software, 199 you won't be able to find transaction details that you need. 200 Instead, build the cost of credit card processing 201 into your price for all customers. 202 This is a part of knowing your worth 203 and knowing the worth of the services or goods you provide. 204 So now that we've discussed the goals for today's lesson, 205 it's checklist time. 206 At the end of your guide, 207 you'll find this awesome checklist. 208 You can walk through each of the steps 209 and write down your business decisions. 210 Once that's done, we'll move on to the next lesson, 211 which you have access to now. 212 Lesson two is all about creating 213 a usable bookkeeping system, 214 including setup, organization of receipts and statements, 215 and categorizing transactions and monthly reconciliations. 216 I'll see you in lesson two.
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