Business Start - Ups

Owning and Operating a Small Business

There are three basic ways to go into business for yourself — start from scratch,  buy or inherit or buy a franchise.  It is wise to choose a field in which you have some prior knowledge. If you go into a business that is completely unfamiliar, you

will be competing with experienced professionals who already know things it may take you years to learn.

Small business owners are completely responsible for what happens to their business. Long after others have gone home, they may have to stay on the job tending to any number of details — getting books in order, going over inventory, rearranging stock,

meeting clients or seeing that repairs are made.

Small business owners must make many decisions, and often make them quickly. Some entrepreneurs come by that ability naturally; others learn through experience. The best decision-makers consider all the choices open to them, use that knowledge judiciously and don’t second-guess themselves once a decision has been made. They realize that making mistakes is part of the process, and they forge ahead with new decisions despite setbacks.  There are several options to consider when deciding what kind of business to undertake. You can sell a product or a service or a combination of the two. You can purchase a new  business or an existing one, and run it by yourself or with a partner. Whatever you ultimately decide, it is important to take the time to examine all the choices. You’ve decided you’re ready to strike out on your own. Now it’s time to look at the resources available to you as you begin to build a solid foundation for success.

Legal Forms of Business Organization

No matter what type business you choose to venture in, you will need some form of legal business organization. There are four basic forms —the sole proprietorship, the partnership, the limited liability company and the corporation. Each has advantages and disadvantages, including tax consequences.

SOLE PROPRIETORSHIP

In a sole proprietorship, you own and control the business. You reap the profits, take the losses and are personally responsible for the debts and other obligations of the business. As a sole proprietor, you report your business income and expenses on your individual income tax return. Setting up a sole proprietorship is the easiest way to go into business. Legally, all you have to do is obtain the licenses and tax identification numbers that the federal, state or local government requires for your type of operation. If the business has a name other than your own, you also must register your business name with your local county clerk. This is the fastest, cheapest way to get into business, and many successful operations have started as sole proprietorships. As your business expands, you can change to a partnership, limited liability company, or corporation if it is more advantageous.

PARTNERSHIP

There are several options available to business owners who want to set up their business as a partnership. A general partnership is a business owned and operated by two or more persons. Partners can contribute capital, specialized knowledge, marketing or management skills and other valuable help. They also share the risk. Generally, partners share equally in the rights and responsibilities of managing the business, and by law each partner is responsible for all the debts and obligations of the firm.

This means you are personally liable for the full amount of the partnership’s debts — even if the debts exceed your investment and you did not personally consent to the debts. Partnerships are easy to start, but they can run into trouble if the day-to-day stress of running a small business leads to friction between the partners.  A written partnership agreement, which should be drawn up by a lawyer, is your best protection. In it you can spell out such issues as the capital contributions of each partner, duties and responsibilities of each partner, changes in partnership structure, dispute resolution methods and financial management. The partnership itself is not taxable. Instead, you report the firm’s income and expenses on federal and state “information” tax returns and you are taxed on your share of the profits or lose at your individual income tax rate.

The deduction of losses from your personal income tax statement could be a tax advantage.

Limited Partnership

A limited partnership is a partnership formed by two or more persons having one or more general partners and one or more limited partners. Personal liability is joint and individual for the general partners who are responsible for the obligations of the partnership. Limited partners are liable to the extent of their capital contribution to the partnership. The life-span of the limited partnership is for the period stipulated in the Certificate of Limited Partnership; or until a dissolution event occurs. For purposes of taxation, a limited partnership is not treated as a separate taxable entity; business income is taxed through each partner’s personal tax return. If you want to operate a limited partnership, you must file a Certificate of Limited Partnership (following an agreement of the partners) with the Department of State. The Revised Limited Partnership Act requires that the limited partnership then publish notice of the formation in two newspapers and file Affidavits of Publication with the Department of State.

Registered Limited Liability Partnership

Since 1994, New York State has recognized a form of general partnership known as the registered limited liability partnership (RLLP), which offers the benefits of liability limitations traditionally associated with professional corporations. Professionals are defined as those persons authorized by law to render a professional service in New York. This includes, among others, physicians, attorneys, certified public accountants, architects and veterinarians. Typically under New York law, general partners are liable for the debts and obligations of each partner when partnership assets are not adequate. But partners of an RLLP are liable only for their own professionally negligent or wrongful acts, not for the negligence of their partners. A general partnership may elect to become an RLLP by filing a registration form with the Secretary of State and paying the appropriate filing fee. The Partnership Law requires that the registered limited liability partnership then publish notice of the registration in two newspapers and file Affidavits of Publication with the Department of State. The registration must include such information as the name and address of the principal office of the RLLP, the profession or professions practiced, a statement of eligibility, and the date of the proposed effectiveness of the RLLP.

LIMITED LIABILITY COMPANY

A limited liability company (LLC) retains the management flexibility of a partnership while offering some of the advantages of a corporate structure. In an LLC members retain the same liability protection they would receive by incorporating, but avoid the double taxation that is required of most corporations. This ability to manage your own business and avoid personal liability as well as taxation on both profits and personal dividends makes the LLC well worth considering. To form an LLC, you must prepare organizational documents and file a document called the “Articles of Organization” with the Secretary of State, accompanied by the appropriate fee. The Limited Liability Company Law requires that the limited liability company then publish notice of its organization in two newspapers and file Affidavits of Publication with the Department of State. LLC names must be followed by the words “Limited Liability Company” or the abbreviations “LLC” or “L.L.C.”

CORPORATION

A corporation is a business that may have one or many owners, and which conducts transactions as an individual entity. Many corporations start out as one of the other forms of business organization presented here. All corporations are considered Ccorporations unless a special election is filed for S corporation status (see below). The decision to incorporate is sometimes based on a need for additional capital for expansion, which may be done by selling shares of the company to outside investors.

A corporation is run by elected officers rather than by the owners or shareholders. To identify if a business is incorporated, look for the abbreviations Inc., Corp. or Ltd. There are many advantages to forming a corporation. These include protection of the stockholders from personal liability; easy transfer of ownership; a separate legal existence that is stable and relatively permanent; and greater ease in securing capital from investors. Disadvantages include limitations on corporate activities; possible conflict between company management and the board of directors; and government regulation and paperwork at local, state and federal levels. Corporations also may be subject to substantial taxes and government filing fees. To create a corporation, you must follow specific statutory requirements, which include filing a Certificate of Incorporation with the New York State Department of State, Division of Corporations, 99 Washington Ave, One Commerce Plaza, Albany, NY 12231, telephone 518-473-2492, www.dos.state.ny.us

S Corporation

Businesses that want to incorporate but wish to avoid the tax burden of a corporation may form an S corporation. The income and expenses of the S corporation are distributed to shareholders in proportion to their shareholdings, and profits or losses are taxed at the shareholders’ individual tax rates. In contrast, a C corporation’s profits are taxed twice, on both corporate profits and shareholders’ income. Not all corporations qualify for S corporation status. An S corporation cannot have the following: more than 75 shareholders; any non-individual shareholders, other than not for profit corporations, estates and certain trusts; a nonresident alien as a shareholder; and more than one class of stock. To apply for S corporation status, you must first be a corporation. Then, the corporation must elect S corporation status for federal income tax purposes by filing Form 2553 with the Internal Revenue Service. A corporation which has elected S corporation status for federal income tax purposes may then elect S corporation status for New York State income and corporation franchise tax purposes. This is done by completing Form CT-6, “Election by a Small Business Corporation” and submitting it to the New York State Department of Taxation and Finance to the address indicated on the form. For more information, contact the New York State Office of the Department of State, Division of Corporations, 99 Washington Ave, One Commerce Plaza, Albany, NY 12231, telephone 518-473-2492, www.dos.state.ny.us 

Because of the complex nature of these various forms of business organizations, it is advisable to consult with an attorney and an accountant to help you thoroughly evaluate which option is for you. A lawyer can prepare the proper legal papers and advise you on your legal obligations, while an accountant can describe the tax advantages and disadvantages of each form.

CASH FLOW FORECASTING

You should try to estimate your monthly cash flow at least 12 months in advance and update it monthly with the real figures. When there are significant differences between real and projected cash flow, try to figure out why, so that your future projections will be more accurate. Items to watch very carefully in your cash flow analysis are credit and accounts receivable (the money people owe you). Be careful not to get too much of your working capitalized up in accounts receivable, since this can rapidly deplete your cash pool and the ability to pay your own creditors. Use the sample cash flow projection and analysis on page 12 as a guide for developing your own. The expenditure categories are only suggestions. You can get pads of paper suitable for cash flow projections from office supply stores, or if you have access to a computer, there are financial programs available that will do cash flow projections, revenue and expense statements, balance sheets and more. To calculate your financial status at the end of each month, subtract total expenditures from total cash available. If the result is negative, you will have to come up with more cash to meet your expenses.  Negative ending positions are fairly typical in start-up businesses and in businesses that are growing rapidly. Plan for them by making sure you have enough cash in the bank to cover your expenses each month. That may require borrowing or attracting new permanent capital to your business. Established ventures with large seasonal variations often depend on a revolving line of credit or extended dating (payment due dates) to handle a temporary shortage of cash. Most business experts agree that you should do your cash flow analysis and cash flow projection monthly. It forces you to be more realistic and disciplined in your thinking and keeps your attention focused on the bottom line.

Operating A Business, Paying Your Taxes, And Save

What are My Self-Employed Tax Obligations?

As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording “self-employment tax” is used; it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited.

 You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions

Payment Due Dates

You can pay all of your estimated tax by April 15, 20XX, or in four equal amounts by the dates shown below. 

Income Reporting for Self-Employed Persons

Your customers and clients may request that a self-employed vendor fill out a Form W-9. The information contained on this form will be used to provide the self-employed person with a Form 1099-MISC after the year is over to report repayments during the year that totaled $600 or more. Form 1099-NEC/MISC is sent to the IRS as well.

The self-employed person might likewise need to request W-9 Forms from vendors and subcontractors and in turn issue 1099-MISC if they paid $600 or more to any single vendor.

Additionally, the self-employed person will report their total gross income for the year on Form 1040 using either Schedule F if they are running a farm or Schedule C if they are conducting a non-farm-related business.

Work both as an Employee and Self-Employed

Some self-employed persons also work as employees. In this situation, their total Social Security tax will be coordinated using Schedule SE when calculating their Social Security and Medicare taxes. A single Social Security wage base, currently at $118,500, is used for compensation income, whether as an employee or self-employed. Additionally, the self-employed person might be able to adjust their withholding on their wage income to have more taxes taken out, in lieu of sending in estimated payments.

What if You’re Not Really Self-Employed

Some employers mistakenly classify their employees as self-employed contractors. This has the advantage (to the employer) of not having to incur the administrative and financial costs of payroll withholding. But this can have a huge tax impact on the worker, who now has to pay twice the Social Security and Medicare taxes they ordinarily would pay. Workers who think they may have been wrongly classified as an independent contractor can contact the IRS to request that the agency look into the matter. To facilitate this IRS investigation, the worker should use Form SS-8 , requesting that the IRS make a determination of whether the worker is self-employed or an employee.

Retirement Plans for Self-Employed People

Are you self-employed? Did you know you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans? Below are some options that you have to choose.

Types of Retirement Plans

Individual Retirement Arrangements (IRAs)
Roth IRAs

401(k) Plans
403(b) Plans

SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
SEP Plans (Simplified Employee Pension)
SARSEP Plans (Salary Reduction Simplified Employee Pension)
Payroll Deduction IRAs

Profit-Sharing Plans
Defined Benefit Plans
Money Purchase Plans
Employee Stock Ownership Plans (ESOPs)

401(k) Plan

• Make salary deferrals up to $17,500 in 2014 and $18,000 in 2015 (plus an additional $5,500 in 2014 and $6,000 in 2015 if you’re 50 or older) either on a pre-tax basis or as designated Roth contributions.
• Contribute up to an additional 25% of your net earnings from self-employment for total contributions of $52,000 for 2014 ($53,000 for 2015), including salary deferrals.
• Tailor your plan to allow access to your account balance through loans and hardship distributions.

State Income Tax

• State income tax rates apply to net self-employment income. Some states have a flat tax rate, other states have progressive or graduated tax rates, and still other states have no income tax at all.

 City and Local Taxes

• Cities and localities throughout the nation impose their own income taxes. New York City is perhaps the most famous example of a city income tax. Some local taxes are imposed at the city level; other taxes are imposed at the county level, while other taxes are set by school district.
  More about city and local taxes .

• New York: Yonkers and New York City both have individual income taxes.  New York City’s income tax rates range from 2.907% to 3.648%.  Yonker’s income tax rate is equal to 10% of your net (after credits) state income tax.
  
  

Various Local Business Taxes

• City and county governments may impose business taxes on self-employed persons, such as city business license or city payroll taxes. New York City, for example, imposes an Unincorporated Business Tax on self-employed persons.

Who Has to Pay New York City Income Tax?

Every income-earning individual, estate and trust residing in New York City must pay New York City personal income tax. Taxpayers who have lived in NYC for only part of the year calculate their tax based on the days lived in NYC.