Starting a Business Series - Q&A SessionSep 15, 2021
This is the Q&A section to our "Starting a Business Series". This series stemmed from a conversation I had a bit ago with a brand new business owner. They were completely lost and no idea where to start.
If you missed any of previous articles and Podcast episodes they are:
- What Initial Things Should I Consider When Starting A New Business?
- Should I Stay a Sole Prop or Organize an LLC or Corporation?
- How Do I Setup An LLC or Corporation?
- Do I Need To Do Bookkeeping For My Business?
- How Do I Hire Employees In My Business?
- What Do I Need To Know About Taxes As A Business Owner?
- How Do I Pay Myself As A Business Owner?
- What Are Estimated Taxes and How Do I Pay Them?
- What Apps Do I Need As A New Business Owner?
Throughout this series, we have had a lot of people reach out on our Free Facebook Group with questions. Many of those questions it did not make sense to do a whole episode on which is why we are having this quick hit Q&A episode to go through them.
In no particular order, here we go:
Do I need a business bank account, how does that work?
Yes, you should always have a business bank account that is separate from your personal bank account. If you need a credit card you should have a separate credit card tied to the business as well.
How Do I Open A Business Bank Account?
You can work with any bank that offers business accounts. In order to open a business bank account generally you will need your Articles of Incorporation from the state along with your EIN number. If you are simply operating as a sole proprietor the bank should be able to open account for you on that as well.
We did a Podcast episode awhile back with a digital bank called Relay Financial. If you would like an invite for them, contact us.
Otherwise there are a lot of options out there including local options. I always say that if you are looking for easy connection to your bookkeeping software the big name banks usually play well (Ex: Chase, Wells Fargo, etc.)
There are so many ways to collect credit card payments. What is the best way to do this? How do I get these to direct to my bank account?
Credit card processing can get complicated and it's usually because the companies out there make it hard to understand. When it comes to credit card processing, you need to think of a lot of things like:
- How much are you processing each month?
- What CRM or POS system do you use?
- What industry are you in?
Generally we say that if you have less than $10k in monthly processing, simply using an easy to use software like Stripe or Square or one of those will be fine. If you are having much larger amount in credit card processing you may want to look into a more personalized solution.
Just be careful out there. There are a lot of people doing some unethical things in this space so just ensure you are reaching out to the right people.
As it relates to getting the funds in your bank account. All merchant processors will ask for banking information so they can deposit the funds there. There is usually a slight delay from credit card processing until actual deposit.
What is the best system to do my bookkeeping?
It depends. Everyone has there own thoughts and opinions when it comes to bookkeeping software. The biggest thing I can say, is ensuring you simply HAVE a bookkeeping system. Then it often times just comes down to preference.
We use (both internally and for our clients) a software called Xero. Quickbooks Online is of course a popular one that you have probably heard of as well. I often compare these two to Apple and Android. Both are great software, servicing the same type of client, and roughly the same price, it just comes down to preference.
Another free option out there that is alright for those just getting started and that plan to stay small is a software called Wave.
Of course there are many others but Xero and Quickbooks Online are the most common with our pick being Xero!
What things do I need to know from the beginning to save on taxes at the end of the year?
This could be a very length answer. The first thing I would say, is ensuring you have the right entity setup. If you expect to have a decent profit you may want to look at an S Corp which means from the beginning you'd need to have an LLC or C Corp. That would be one thing to consider.
Outside of that, check out this resources:
- Listen to the Small Business Tax Savings Podcast - Shrinking your tax bill is the easiest way to put more money in your pocket each and every month. The Small Business Tax Savings Podcast is designed specifically for small business owners like you.
- Ultimate List of Business Deductions - Can I deduct this? Can I deduct that? Take the guesswork out and download our white paper listing out every possible business deduction we could think of.
- Join Our Tax Minimization Program - Our monthly program where we present all kind of tax strategies available, you also have access to our team of professional to ask general accounting or tax questions, along with many other benefits.
Should I have a business credit card?
That is totally up to you. If you plan to have a credit card that you are using for your business then yes you should have a separate business credit card. With that being said you do not necessarily need a credit card for your business.
If you do a lot of business spending, using a credit card to earn points could be very beneficial. However, be careful. I always recommend business owners pay off their full credit card balance each month.
If I setup a new entity what do I need to do for the people paying me?
You would need to alert them of the new banking information to send payments to. They will also likely ask for an updated W9 that includes your new company information along with EIN.
What would I categorize checks that I bought as?
These would be recorded as an office expense.
If I just bought a truck for work, personally, how do I get that into the business?
If it is going to be use mostly for business, put it in the business name. When doing this we capitalize it and put it on the books. If the vehicle is in your personal name, we will not capitalize the vehicle or put the loan on the books. Instead you will use an accountable plan to “reimburse” yourself for the business use of the vehicle.
How does business mileage work?
Here is an article we did on this previously. This one is pretty straight forward. You get a certain amount of money per mile driven. Here is the mileage deduction rates for 2021:
- Business: 56 Cents per Mile
- Charity: 14 Cents per Mile
- Medical and Moving: 16 Cents per Mile
- Personal or Commuting: None
Note: For the business side, if you use your vehicle for business less than 50% of the time, you MUST use the mileage deduction.
How does a DBA work for entity organization?
DBA stands for "doing business as" which means it's not an actual entity structure. You can have a sole prop,Partnership, LLC, S Corp, C Corp, etc that have a DBA. As an example, Small Business Tax Savings Podcast is a DBA to an actual LLC that we have.
The purpose of a DBA is so that your business can operate under a name different from your actual entity but it is important to know that a DBA is not a physical entity structure it would have to be under a company or you personally.
What is a registered agent?
A registered agent is simply a person or entity that will accept official mail on behalf of the business. Your registered agent does not need to be an owner but it can be.
Should I open my entity in a state other than where I live because I live in a high tax state? OR What should I look for in choosing the state to incorporate in?
We see this question pop up constantly. This is something you should be discussing directly with your lawyer to see if there is a legal reason you should be incorporating in another state.
From a tax stand point you will need to be registered in whatever state you operate out of either way. If you live and operate your business out of California you can register your business in another state (Ex: Delaware) but you would still need to file as a foreign entity in California where you are operating.
Therefore, from a tax stand point you do not get any advantage incorporating in a state other than the one you operate out of, you actually will end up having additional yearly fees to keep the company active since you'll need to keep it active in multiple states, the one you are organized in and the one you filed as a foreign entity in.
This is why we often recommend, from a tax stand point, that clients organize in the state they operate out of.
My entity is 100% online so I do not operate out of any state, how does that change things?
This is a great followup to the previous discussion and the biggest thing here is that even though you have an online company, you still operate it out of somewhere. If you as the owner live in California and you manage the business then you'd be operating out of California.
If you have employees located in other states as well, you may need to register as a foreign entity in those states as well since you may have operations there.
Do I need to worry about sales tax in my business?
We did both a Blog post and Podcast episode on this earlier this year that you can check out here.
Does an LLC need to file quarterly taxes?
The LLC as an entity would not file quarterly taxes (outside of payroll type items if necessary). With that being said, the owners of an LLC or S Corporation should be paying quarterly estimated taxes if they are making a profit in their business.
We covered that in a recent Blog and Podcast episode which you can find here.
I have an LLC formed in XYZ State but I moved to ABC State and started working. How does this work for the entity?
You would simply file as a foreign entity in the new state and you moved to are working out of. You would still have the form entity organized in XYZ State but then you would have a foreign entity in ABC State.
What are the benefits to an S Corporation?
We could go on for days regarding this. We did a whole series on S Corps that you can find here. The biggest advantage of an S Corp is minimizing a portion of self employment taxes. Essentially with an income tax you split your income into two pieces, a reasonable salary (aka payroll aka W2 employee) and and owners draw or distribution.
If you were setup as a sole prop or Single Member LLC you'd pay self employment taxes on 100% of your income. However, with an S Corp you essentially pay self employment taxes on your required reasonable salary but avoid self employment taxes on any income above that reasonable salary.
I am wondering if I claim the home office deduction, does this impact the amount of the homeowners deduction filed on personal taxes?
It depends. We did an Blog and Podcast episode on the home office which can be found here.
Basically if you do the "simplified option" it would not impact your itemized deductions at all. However if you use the actual method and take advantage of mortgage interest or real estate taxes as part of a business deduction you can not take that portion again on your personal return.
How does giving to charities and non-profits work with S Corporations?
It would work the same way as giving personal. You would make a payment to the charity using business funds and classify as a charitable deduction. However, that will show up on your K1 which you will eventually report as an itemized deduction on your personal tax return.
Often times we encourage business owners to mix sponsorship or advertising with their charitable contribution so that they can record it as advertising vs charitable deductions and get a full business deduction without having to worry about itemized deductions.
When is good time to go from sole proprietorship to LLC?
If you plan to grow your business past $40k-$50k in profit at any time we recommend opening up an LLC so that you can have the option to elect S Corp status should you wish. Unfortunately as a sole prop, you cannot elect S Corp status.
Lets say you are setup as a sole prop determine in June that you are going to have high profits and want to explore an S Corp, unfortunately any income under the sole prop you cannot put under an S Corp. If you decide in June to open an LLC any activity after that LLC is open can be under an S Corp but anything prior would remain as a sole prop.
For that reason we always recommend incorporating right away if you plan for this business to take off and generate income. If it is completely in the air and just a test at this point then you may want to hold off until you have a proven business.
Of course an LLC can also provide some legal benefits that a lawyer can talk though.
If I'm an S-Corp owner and I take a 50K draw from the business, do I get taxed on that at an individual level when I file my 1040?
You would not be taxed directly on that "draw". However that draw would not be considered a business expense and thus not lower income for the business which is eventually what you pay taxes on at the personal (1040) level.
This can be hard to understand sometimes so if you are having troubles with this concept, factor in having to pay taxes on any amount you draw. You will in fact have to pay taxes on your S Corp profit, regardless of whether or not you take a draw or how much the draw is.
Do you need an EIN number to use the Augusta Rule?
Every business should ideally have an EIN number. With the Augusta Rule your business has to be a separate legal entity so if you are just a sole proprietor it would not work on this one.
What is the best formula to use when calculating Estimated Quarterly Taxes for an LLC?
We covered that in a recent Blog and Podcast episode which you can find here. We recommend checking out those calculation options there. We don't like to give just a general number because everyone's situation is different. With that being said a rough number would be to put 30% of your profit aside for taxes.
You might owe less than that, you might owe more, but it is a rough idea. As we mentioned check out the article on estimated taxes and I would highly recommend using those strategies versus a general number.
My husband is a small business owner and also an employee for another company. He has a 401k for his W2 job. My question is can my husband qualify to do the Individual 401k on top on it?
For this one, our retirement expert, Matt Ruttenberg over at Life Inc Retirement Services hopped in and said: "Yes, you can layer the two on top of each other as long as he doesn't go over the maximum contribution rate."
Finally, I highly recommend you sign-up for our Tax Minimization Program (w/ Stress-Free Bookkeeping Training) as not only will you get a bunch of in depth training, templates, group coaching but you also have unlimited access to our team for general tax and accounting questions. How sweet would it be to have an accounting professional by your side for those questions that pop up in this crazy journey of being a business owner?
The Time Is NOW To Start Paying Less In Taxes. Join Our Tax Minimization Program (w/ Stress Free Bookkeeping Training)!
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