Business Formation from a Legal and Accounting Perspective
Last week's Morning MindFUEL was a success! We want to send a huge thank you to Kelly & Craig DuFord for hosting the meeting, and for Kelly's amazing legal expertise and insight into business formation and for Janet Wennes filling in the gaps with her brilliance in accounting.
Thank you to all of you who joined us for this meeting. We saw some new faces and loved getting to know you and introduce you to our amazing members.
Alright, we know this meeting offered A LOT of information, and some of it can get a bit confusing. With that said, we have put together a little outline of what Kelly and Janet shared with us with some helpful links and resources. We hope it helps!
DBA (Doing Business As)
Also known as Fictitious Business Name
- A DBA is your first step if you are one person doing a business under a name that is not your name. For example : Brittney Hogan started a company called "The Tea Shop".
- A DBA means that you are a Sole Proprietor.
- It is inexpensive to start and manage.
- If you are working with Partner, you would not be considered a sole proprietor, and there are more options for you below.
- If you have a degree or certificate you don’t need a DBA unless you add something to the end of your name.
- It is important to get a DBA at least because you need to have your name set up so the state and your clients know where to find you.
- You will need to obtain a Tax ID # (See Below)
- Protection - A Sole Proprietorship offers you no protection. Therefore, if you are a sued, you are personally liable for the debt. Your assets could be majorly affected. Kelly DuFord says even if you don't have any assets yet, if you plan on having any in the future, it is best to form another business entity type to protect yourself and your future.
- Here's a link to setting up your DBA - https://arcc.sdcounty.ca.gov/pages/fbn-info.aspx
- This name just registers you as a business, if you want to sell anything, you must obtain a Seller's Permit. Do that here.
ACCOUNTING / TAXES
For a Sole Proprietorship, you need to file a Schedule C - Sole Proprietorship form for your taxes.
- You need to track your expenses. Quickbooks is what we recommend. They have plans ranging from $5 - $25 a month for small businesses and entrepreneurs, and it is definitely worth the cost. It is simple to use and very efficient. It will definitely take some learning, but feel free to ask us for recommendations for accounting help. We know some people :)
- Janet offers a Self Employed Spreadsheet and Checklist for her clients. Contact her here.
- You’re going to use your net income and pay self employment taxes on it. Self Employment tax in California is currently 15.3%
- This means you will not have taxes coming out of your paycheck every pay period, so you have to put some income away to pay taxes at the end of the year. Janet recommends the minimum you put away is 15.3%. And also to soften the blow a bit, do quarterly tax payments rather than one big one in April.
- CPA doesn’t need to see receipts, but you need to save them in case you get audited.
- Janet recommends scanning all receipts and keeping on file in your computer.
- If you are a 1099 employee, you need to be saving for taxes as well.
- Anytime you receive more than $600 from a client, you need to have a 1099 form and fill out a W9 with the client so they can report it as well.
- Which also means, you don't have to 1099 someone unless you paid them over $600.
- If you know your payments to them are going to exceed $600, get the employee to fill out a W9 form before you pay them, otherwise it can be quite difficult to get that form back from them.
- Check this out to read more about the difference between a 1099 form and a W9 form.
- The laws are pretty strict for 1099 - See Kelly if you have any questions or doubts at all. Contact her here.
TAX IDENTIFICATION #
[ Also known as a resale license or EIN # ]
- Don’t ever pay anyone to set up a tax id number for you, as it is free and easy. NEVER USE YOUR SOCIAL SECURITY # AS YOUR TAX ID#. It is allowed, but not smart to have your social floating around out there.
- CLICK HERE TO OBTAIN A TAX ID # : https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
LLC (Limited Liability Company)
- Easiest to manage and most cost effective
- File Articles of Organization
- An Operating Agreement is required by law
- Bank account required
- You are not legally liable if anyone were to sue you, you are protected by the LLC. The LLC and its assets would be liable, not you.
- Would you like a house? Car? Family some day? Judgements against you (as a Sole Proprietorship) will keep you from doing so. It will even show up on background checks and effect employment.
- Some start up costs and an annual fee of $800.
- Annual fee must be paid whether or not you make any money.
- If you are an llc, you don’t need a DBA.
- You can switch from a DBA to an LLC.
- Or you can choose to have your LLC own your DBA under an umbrella.
- You can form an LLC by yourself, but it recommended to consult a Lawyer as the forms can be quite tricky. Form for filing an LLC here.
- Normally a Schedule C if the LLC is made up of one individual / But you can also choose to be taxed as an S Corp. See details below. For more information on what tax forms to file for your entity, click here.
- You can take owner draw from your bus account, you don’t pay yourself wages.
Owner Draw: "Owner's draws are withdrawals of a sole proprietorship's cash or other assets for the personal use of the owner. Each of the owner's draws of cash will be recorded with a credit to Cash and a debit to the owner's draws account" (Averkamp, H., 2018).
More on Owner's Draws here: https://www.thebalance.com/what-is-an-owner-s-draw-how-does-a-draw-work-398231
- Whatever is left over after you pay expenses is what you are taxed on.
- If you want to buy a house, you can write yourself a check for the money and and it won’t be taxed again because you’ve already been taxed for it.
- LLC tax receipts are taxed on gross receipts instead of net.
- Operating agreement should be done by an attorney, no matter what.
- You have 75 days to elect to be taxed as an S Corp after you are officially an LLC.
- However you have to be ready to pay yourself a salary and it has to be reasonable.
S Corp (Taxation Option)
- With an S Corp you are not paying double taxation like you would in a corporation. You are only taxed once - it is considered a pass through entity.
- You can have shareholders and stocks but every person needs to be treated the same
- Only Citizens of the United States can be shareholders.
- Only 100 members / shareholders
- It is a separate tax return - so separate fee
- Every officer must have wages or you will be audited.
- Basic rule - 60% wages / 40% draws
LLP (Limited Liability Partnership)
- LLP are like an LLC but for partnerships
- Unless you are a partnership, you can’t get one
- These are mostly for law firms, accounting firms, etc.
- Same protection as an LLC and around the same costs.
C Corp (Corporations)
- Typically when you hit a certain threshold of income as a business (net 50k-60k), then you want to switch to a Corporation.
- Must have a Board of Directors
- Bylaws are required
- Have monthly meetings involving officers and board of directors
- Great for investors / shareholders
- Biggest downside of a corporation is that you are taxed twice - Once at the corporate level and once at an individual income level on dividends that you are paid from the company.
- Does not flow through to your personal tax return
- Corporate tax is currently 21%
- Separate Tax Return - Separate fee
- Every office has to have wages or you will be audited
Intellectual Property Protection
- You can trademark a Name, a Logo, a Tagline.
- link duford FB live video
- must be fanciful, arbitrary or suggestive - air bnb for example - you can kind of tell what that is..
Types of things you can copyright:
- other things of that nature
Something you patent is a new way of doing something, a process, an invention, etc. Something that has never been done before.
A specific recipe for Coca Cola for example. It has to be a secret.
Why protect your intellectual property? If you don't protect it, someone else can easily think of your idea or see it and copy it, they can protect it by trademarking it or copyrighting it and then sue you for using it even though you came up with it in the first place. Also, if you trademark a name and someone else uses it or infringes upon it, you can sue them and make a lot of money.
- CPAs cannot form businesses for you, only lawyers can, as it exposes them and you to liability issues.
- Always make purchases from your business checking account, not personal. Because if you get audited, you want to give the IRS the least amount of personal information as possible.
- Registered Agent - A registered agent is the person or company that you name to accept mail/correspondence on your behalf relating to your company. It is good to have a law office do it so if someone is pissed off with you, they don’t know where you live...
For accounting assistance, contact:
JANET WENNES, CPA
Littleton Wennes CPAs
For legal assistance, contact:
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