Sole Proprietor

-Tied to your SSN

-Sole proprietor uses a schedule “C”

-A sole proprietor and a single person means that the person IS the company

-Schedule “C”, income minus exemptions = income

-If you are married you cannot use schedule “C”

-Sole proprietorship = complete personal liability

-Business loses value with illness or death of the owner

-May pay higher taxes

            -Must pay both personal and business end of SS and Medicare

Corporation (C Corp.)

-Not a person, it is its own entity

-Doesn’t matter how many owners there are

-Is not tied to your SSN, it is its own number for tax purposes

-The corporation is responsible for its own debt, separate from the individual

-The company has its own assets and liability separate from the individual

-Can sell shares

-Ownership is fluid

-Shareholders vote for the board of directors

-Subject to double taxation.

            Can be avoided by either taking wages

            Or receiving dividend distributions

-Combined tax rate of over 50%

-More paperwork

-Corporate losses only affect the company

S Corp

-Separate from the individual

-No more than 75 owners (shareholders)

-Form 2553 required

-Taxed at the shareholder level

-1120S (Profit/ Loss statement)

-Dividends are not payable

            Dividends are different than income; dividend is taxed at a lower rate (5-10%)

-I.e. if you own 80% of the S-Corp you get 80% of the profits as income

-Also, you are not liable, and there is no double taxation.

-Business losses can be deducted form personal income (reduces tax liability)

-Only works as an individual not as a partnership ???

-Limited transferability

-Can only sell common stock (complex formula)

Partnerships

-Multiple sole proprietorship

-Separate entity

-Can have 500 partners

-No double taxation

-Form 1065 (to file taxes with one business name

-Revenue – Expenses =Profit

-No double taxation

-Can become an S or a C Corp without changing tax info.

-Loss can be counted against individual income (i.e. seed money can be deducted)

-Liability falls to the partners.

-Limited transferability of assets

LLC

-Can be a sole proprietorship or a partnership for tax reasons

-Can be treated as a corporation

-Taxed at shareholder level

-Has its own tax ID number

-States differ in LLC laws

-LLC = one person LLP= partnership

-Profit goes to shareholders, if there is one owner then they report that amount on their 1040

-Tax form 1065 and 1040 Schedule C

-Flexible! Can take any structure

-Good for small business

-Limits personal liability

-Members (shareholders) perform management functions.

-Little legal precedent so tax structure may change

-LLC can be declared

Non-Profit Org.

-Code 501

-Net revenue is non-taxable

-Support is given through private funds and donations

-No owners

-Difficult to obtain status

-If the company dissolves the money goes to the Government or other organization

-Tax forms are open to public inspection

Notes

If you set up your structure you should stick with it or people will be suspicious.  What do you want your public face to be?  What tax structure do you want?

Individuals are sole proprietors or LLC.  More than one person is a partnership or corp.

Insurance can cover liability for small business.

If you hire employees you need to get a separate tax ID

If you inc. then you should get representation to help you.

Not as much paperwork with an LLC

Records

Why?

-Keep track of your business progress

-ID where the money is going/ coming from

-Prepare accurate financial records

-Keep track of deductions

-Support items on your return

-Prepare accurate tax forms

-Avoid an audit

What Kind?

-Logbook

-Software

-Different types of expenses

-The IRS says that they can audit within three years.

            I suggest keeping records (receipts etc.) for four years.

            Keep the actual receipts and keep a ledger of some kind

-Documenting mileage

-Keep your records safe (fire proof box)

-Keep things in order

-Know the difference between assets and income.

            -Asset is something you have

            -Income is something you have to spend

            -Something you buy and keep is not an expense, it is an asset

-Gross receipts (Sales)

            Deposit slips etc.

-Purchases

            Credit card statements

-Expenses

            Cancelled checks etc.

Checks leave a good paper trail; petty cash is harder to track

-Assets

            Anything that lasts more than a year

            When/ how the asset was acquired

            Price and cost of improvements

            Section 179, depreciation

            How was it used (business only?)

            When something was sold, both price and expenses

            Keep all asset related paperwork for ten years

            Keep all receipts until the asset is liquidated

Special Rules

-Travel, entertainment and gifts

            Receipts, agendas, brochures from the event, restaurant, etc. to show the business related expense

            Gifts, $25 per person per year.  Above that =no deduction (family loophole)

            Mileage

                        Have the date, where you started and where you went.

                        i.e. leave the office and record your mileage

                        Can also use a logbook

                        Also keep track of the maintenance

                        Keep your log up to date!!!

                        Place employment to the Dr.-Dr. to workshop, which is business related?  Use your best judgment

                        Multiple cars, keep a log for each car.

                        Rental cars are deductible (no mileage)

                        Can only take mileage or expenses? Right, not both.  So if X miles x .36 < expenses (total expense x % of miles used for business) then use mileage.

                        What is travel?  Commuting is not deductible if you have one place of employment, if you have different job sites that’s deductible.  Commuting you do anyway, other travel is a business expense. 

                        Agency pays mileage? So do you deduct it too? No!

            The General Rule: keep records for four years.

                        Keep your employees records for four years

                        Keep records for assets for three years after the asset is liquidated

                        Corps keep records for ever

            Keep personal and business finances separate

            Keep track of/ correct errors in your records

Deductions

-Must ordinary or common for your business

-Must be necessary- helpful and appropriate for your business

            Pager, phone, lodging, some food, car, computer, internet access, (health care?)

-Capital expenses: things purchased which are expected to last more than one year

            Computer for $2000 is deducted over time.

            Business assets (must depreciate)

            Improvements to the asset

            For home business you must be able to log business and personal use (two ID’s?)

-Can’t deduct inventory

-Get a separate phone line for your business

-A room in your home must have a limited use for your business.

-Old computer etc. can be deducted at the depreciated value

-Bad Debt

            Must be

 A true debt (i.e. bounced check paid to you)

Business related

Previously included in income

Reasonable steps taken to collect

No chance that it will be paid

Bankruptcy

-Transportation

            Does not include the commute

            Only “other” travel

            Can use the metro

            Actual Expenses

                        Gas, oil, repairs, maintenance tags registration, gas, car payment depreciation,

            Expenses away from home overnight is deductible

            Meals and entertainment is 50% deductible

            Internet has a per diem for each locality if you don’t remember your expenses.

-Other

            licenses, office supplies, subscriptions to publications

Business Use of a Home

            Use must be exclusive and regular

            Must be the principal place of business or a place where you deal with customers

Payroll Issues

            Who am I?

            1099 Misc. non-employee compensation

Schedule C

-Only one SSN on there.

-Classification Code: Describes your business

-Gross receipts

-Minus etc.

-include interest on your checking account

-Profit/ loss

-Expenses (outlined in the schedule C)

            Personal/ business used items have a worksheet

            Workshops, internet, training is under “other”

            Start with the cost of your home when you bought it

            If your business does not make a profit then you cannot deduct the business use of a home, but you can carry over that deduction to another year.  If you rent just take a percentage of your rent, i.e. four room apt. = deduct 1/4.

-Terps can use a Sched-C EZ

Education Credits

-Education is a personal expense not a business expense

-New career training is not deductible

-Continuing education can be deducted as a personal expense unless it is job related

Medicare = 1.45% of your wages + match from the company

SS= 6.2 on first 87K + match from the employer

If self employed you can deduct your health care

Personal loan to a business

-Sole proprietor can’t do it (i.e. deduct it).  You can deduct finance charges on loans from outside parties.

Don’t do your own legal work!  Get a lawyer.

Per diem info. At www.perdiem.gov 

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You can get a free CD from the IRS (Small Business Resource Guide)