Tired of your day job? Sick of your boss? Your entrepreneurial spirit keeps reminding you that it is about time to start a business and start making money for yourself. Before you call it quit, let’s take a look at what you will get yourself into.
Two deductions are available to you right off the bat: the start-up costs up to $5,000 and organizational costs up to $5,000. Any excess costs must be amortized over a 15-year period.
Next is to choose the right legal entity for your business. The most common forms are either a corporation or a partnership.
A corporation known as “C Corp” has a double taxation feature:
- The company pays taxes on its profits
- The shareholders pay taxes on the wages and dividends received from the company
A partnership known as “LLC” and a corporation known as “S Corp” are both pass-through entities:
- The company itself generally does not pay any taxes
- The LLC partners and the S Corp shareholders receive profit sharing from the company and pay taxes on their personal income tax returns
California LLCs are subject to the following franchise taxes:
- An annual fee of $800, regardless of your profitability
- A gross receipt fee based on the gross sales you generated
S Corp shareholders who also work as employees will need to issue themselves a reasonable amount of payroll and report it on Form W-2. The IRS is very efficient at assessing back taxes and penalties if it determines that your payroll is unreasonable based on the amount of income you generated in the company.
Finally, you must maintain a separate set of bank accounts and business records. Never never ever co-mingle personal assets with company assets.
Take the leap of faith, because your successes await. Fight On!
Jimmy W. Wong, CPA left the comfort and stability of Corporate America and started his own consulting firm with a true passion to help business owners succeed in their endeavors. He is a certified public accountant, an IRS enrolled agent, and a member of the American Institute of CPAs.
Jimmy graduated from California State Polytechnic University Pomona with a Bachelor’s Degree in Accounting. He is currently studying for a Master’s Degree in Business Taxation at the University of Southern California.