We’ve all heard the old saying, “When life hands you lemons, make lemonade.” History has shown us that new businesses and entrepreneurship tend to spike up during economic downturns and recessions. One reason for this is that large businesses and corporations shed employees to cut costs. Many of those furloughed workers see an opportunity to squeeze those lemons, add some sugar, and make lemonade by starting the small business they’ve always dreamed of creating.
As a new business start-up, you need to make sure you get off on the right foot to avoid being tripped up by legal, financial and tax problems that needlessly contribute to the failure of so many newly self-employed entrepreneurs.
Here are five tips to help you get started:
1. Determine the best legal structure.
The first thing a business start-up must decide is whether to operate as a sole proprietor or as some type of corporate entity. As a sole proprietor, you don’t have to spend money on creating corporate documents and filing corporate tax returns. Simply deciding on a business name and filing it with your local government creates a sole proprietorship. That basically costs little to no money at all and is easy to do. However, the question becomes whether you should continue as a sole proprietor and that depends on the business you create and your own personal risk tolerance. Not everyone or every business needs to set up a corporation, but simply being a business owner sets you up for risks that might surprise you. People may come at you with lawsuits or even dun you personally for bills that are generated by the business. If for no other reason, establishing your business as a corporate entity can protect you. Check with your accounting professional or an attorney for their advice on your particular situation.
2. Pay taxes based on your structure.
How you structure your business start-up – whether as a sole proprietorship or as a corporation – determines how you pay your taxes. Given the significance of taxes relative to your business structure, it is important to know how your business is taxed and the various forms, deductions and deadlines involved in meeting your tax responsibilities. You will also want to make sure that your bookkeeping is accurate and up to date all through the year and not just at tax time.
3. Save up for self-employment tax.
As an employee, your employer withheld roughly 15.3% of your income to pay Social Security taxes and to fund Medicare. You paid half and your employer paid the other half. However, all that changed when you became self-employed. You are now responsible for the entire 15.3%. In 2021, that percentage applies to the first $142,800 of net income your business makes. It’s wisest to set aside these monies throughout the year to avoid being surprised at tax time and having to scramble to come up with money you weren’t expecting to spend.
4. Don’t forget about insurance.
As a new business start-up, you most likely do not have extra cash laying around and it’s easy to avoid spending money on insurance you think you might not need. If, as a sole proprietor, you are working out of your home and the only risk is someone falling or losing your office equipment in a fire, then check with your insurance agent to make sure you are covered under your homeowner’s policy. If your business is located outside your home, you will want some minimum amount of coverage on your office and equipment. Liability insurance is another matter worth serious consideration. We live in the most litigious society in the world so if your new business has the potential to be sued, you should consider some type of liability insurance. Again, check with your insurance agent to see what type of liability insurance best suits your business.
5. Pay yourself.
You left a steady income to start your dream business but what good is that if you don’t pay yourself? Most small business owners pay themselves by taking money from their business income. This is called an owner’s draw. If your business is a corporation and you’re involved in day-to-day operations of the business, then the IRS may require you to take a salary as opposed to an owner’s draw. In any event, remember that whichever form of payment you choose, you will be required to pay taxes on it at some point down the line, so it is best to plan accordingly.
This current pandemic lockdown has created one of the deepest economic downturns in our country’s history. But, with adversity comes opportunity. If you’ve been handed a bucket of lemons, go ahead and make that lemonade. Just be sure you follow the recipe for success.
Numbers by Victoria is a West Palm Beach bookkeeper who offers virtual bookkeeping services and other financial options for individuals and small businesses. Since our services can be performed virtually, we’re able to work with people all over the United States. To contact Numbers By Victoria, or to learn more about our bookkeeping services, please visit: www.numbersbyvictoria.com.
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