Starting a business can be an exciting prospect....or a frustrating, confusing task that seems impossible to conquer.
Which
one will apply to your situation will depend on how well you plan, how
much you educate yourself, and how disciplined you are in following
through.
Many people start out with a great idea, but don’t know how to translate that idea into a viable business.
Where Do I Start?
Your
first step should be your business plan. Many would-be entrepreneurs
will skip this step, choosing the fly-by-the-seat-of-your-pants method
instead, but starting a business without a business plan is like
embarking on a long journey to an unfamiliar place without a map.
A
business plan serves to define your goals, map out your plan of how to
achieve them, and will provide you with a sense of purpose and
accomplishment along the way.
Your business plan should include the following elements:
1) the description of the business
2) the marketing plan
3) the financial management plan
4) the management plan
The Small Business Administration offers an online tutorial on how to write a business plan. http://www.sba.gov/starting/indexbusplans.html
One of the first decisions your will have to make is what form your business should take. The most common forms are:
- Sole Proprietorships
- Partnerships
- Corporations
Which form you choose will depend on many factors, including:
- Legal restrictions
- Liabilities assumed
- Type of business operation
- Earnings distribution
- Capital needs
- Number of employees
- Tax advantages or disadvantages
- Length of business operation
Some of the advantages and disadvantages of each type is outlined below:
Sole Proprietorship
This
is the easiest and least costly way of starting a business. A sole
proprietorship can be formed by finding a location and opening the door
for business. There are likely to be fees to obtain business name
registration, a fictitious name certificate and other necessary
licenses. Operating a Sole Proprietorship is easiest as the owner has
absolute authority over all business decisions.
Partnership
There
are several types of partnerships. The two most common types are
general and limited partnerships. A general partnership can be formed
simply by an oral agreement between two or more persons, but a legal
partnership agreement drawn up by an attorney is highly recommended.
Legal fees for drawing up a partnership agreement are higher than those
for a sole proprietorship, but may be lower than incorporating. A
partnership agreement could be helpful in solving any disputes. However,
partners are responsible for the other partner's business actions, as
well as their own.
Corporation
A business may
incorporate without an attorney, but legal advice is highly recommended.
The corporate structure is usually the most complex and more costly to
organize than the other two business formations. Control depends on
stock ownership. Persons with the largest stock ownership, not the total
number of shareholders, control the corporation. With control of stock
shares or 51 percent of stock, a person or group is able to make policy
decisions. Control is exercised through regular board of directors'
meetings and annual stockholders' meetings. Records must be kept to
document decisions made by the board of directors. Small, closely held
corporations can operate more informally, but record-keeping cannot be
eliminated entirely. Officers of a corporation can be liable to
stockholders for improper actions. Liability is generally limited to
stock ownership, except where fraud is involved. You may want to
incorporate as a "C" or "S" corporation.
What About Taxes?
It is very important to understand the tax laws that apply to the type of business you have chosen.
There are four basic taxes that you should be aware of:
- Income Tax
- Self-Employment Tax
- Employment Taxes
- Excise Tax
Income Tax
You have to file an Income Tax
return if your earnings were more than $400 for the tax year. Even if
your earnings were less than $400 from your business, you may still have
to file a 1040 if you meet any of the criteria listing in the 1040
instruction booklet.
If you expect to owe more than $1,000 in
Income Tax, you may have to pay Estimated Taxes. There are four ways to
pay estimated taxes:
- By crediting an overpayment on your 1999 return to your 2000 estimated tax.
- By sending in your payment with a payment-voucher from Form 1040-ES.
- By paying electronically using the Electronic Federal Tax Payment System (EFTPS). For EFTPS information, call 1-800-945-8400 or 1-800-555-4477.
- By credit card, using a pay-by-phone system.
For more information on Estimated Taxes, see the IRS website [http://www.irs.ustreas.gov/forms_pubs/pubs/p505ch02.htm]
Self-Employment Tax
Self-Employment
Tax must also be paid if your net business earnings were more than
$400. SE Tax is a Social Security and Medicare tax that provides
retirement benefits, disability benefits, survivor benefits, and
hospital insurance benefits to you under the Social Security system.
You can deduct 1/2 of your SE tax from your net earnings on your 1040.
For more information on SE taxes:
[http://www.irs.ustreas.gov/forms_pubs/pubs/p3340103.htm]
Employment Tax
If you employ others in your business, you will need to report Employment Taxes. For specifics and tips on Employment taxes:
[http://www.irs.ustreas.gov/forms_pubs/pubs/p15toc.htm]
Whether
or not you need an EIN (Employment Identification Number) depends on
your business structure. You only need an EIN if you:
- Pay wages to one or more employees
- Have a KEOGH plan
- Operate as a corporation or partnership
- File any of these tax returns:
- Employment
- Excise
- Alcohol, Tobacco or Firearms
To obtain an EIN, you must fill out an SS-4 which is available through the IRS.
Excise Tax
Excise Taxes apply to certain types of businesses and certain business activities. Some examples are:
- Tractor or heavy machinery sales
- Tobacco, alcohol or firearms manufacturing or sales
- Business activities or products that have environmental impact
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