Starting a New Business & Launching Successfully: Tax and Business Planning Tips

GREG KELLAR: Welcome to Cherry Bekaert's Private Client Service Podcast, where we discuss tax, accounting, and business matters impacting your business and personal growth goals to help guide you forward to achieve your financial objectives.

GREG KELLAR: I'm Greg Kellar, tax senior manager with Cherry Bekaert's Private Client Service Group, and with me today is TJ Wilson, leader of Cherry Bekaert's Gastonia Tax Practice.


TJ WILSON: You're welcome. Glad to be here to talk about this important subject.


GREG KELLAR: TJ, I'm starting a new business. What do I need to set up that business?


TJ WILSON: First, congratulations. It's important to take the right steps to create and organize the business so you start on the right foot.

TJ WILSON: Greg, is there going to be more than one owner of this business?


GREG KELLAR: For right now, I'm the only owner, but I might bring someone on later.


TJ WILSON: Have you contacted an attorney, or do you have an established relationship with an attorney?


GREG KELLAR: I don't have one right now.


TJ WILSON: That's something we'll need to look into. A business attorney can help with organizational documents and structures. At this point, we can review general items and organizational steps you need to consider.

TJ WILSON: There are three general types of businesses: a sole proprietorship, a corporation, or a partnership. It sounds like you're a single owner now but may bring in additional partners or owners later, which affects entity selection.

TJ WILSON: For purposes of this discussion, assume you will create a corporation. The first step is to have your attorney file articles of incorporation with the Secretary of State to establish the legal entity. Next, the attorney should prepare corporate bylaws and a shareholder agreement to document how the entity will operate.

TJ WILSON: You will need to obtain an Employer Identification Number, which can be done on the IRS website using Form SS-4. The next major consideration is determining the capitalization or funding of the business. Do you anticipate funding it from your current assets or borrowing from a third party?


GREG KELLAR: I'd like to put some money into the company, but I'd like to get that money back down the road. I was thinking I might put some in as a loan and leave some money in the company.


TJ WILSON: We can determine an allocation between how much funding is capital, such as common stock, and how much should be considered a loan from you. You should establish a formal loan document with your attorney so the funding is documented correctly as a loan and can be repaid without a tax obligation.


GREG KELLAR: I'd like to make some interest on that loan.


TJ WILSON: You should set the loan interest at least at the applicable federal rate and possibly higher depending on current market terms for the note. Those are the main initial steps to get started. There are multiple entity classifications and elections that can be made, but those are the basics to get your business off the ground.


GREG KELLAR: TJ, I heard that an LLC is the easiest way to set up a business. Just file for an LLC and I can get started. What would happen if I did that?


TJ WILSON: If you file as an LLC, its tax classification defaults to a partnership if you have multiple members. If it's a single-member LLC, it defaults to a sole proprietorship and is reported on your individual return. In both situations, the net earnings are subject to income tax and self-employment tax.


GREG KELLAR: So if I set up an LLC and I'm the only owner, I file the taxes on my personal tax return. If there's another owner with me, then we'd file a partnership tax return.


TJ WILSON: That's correct.

TJ WILSON: Now that you've set up your business, what type of insurance would you need?


GREG KELLAR: What insurance do I need?


TJ WILSON: It depends on the type of business, but generally you need a general liability insurance policy. If the business owns property, you need commercial property insurance. Consider business continuation insurance to cover lost profits during a shutdown for rebuilding, such as after a fire.

TJ WILSON: Cyber liability is an increasingly important coverage due to cyberattacks, and you should consider professional liability insurance as well. These policies can be acquired through a reputable commercial insurance carrier.


GREG KELLAR: Do I need to set up a separate bank account to record business transactions, income, and expenses, or can I use my personal account?


TJ WILSON: You should set up a separate business account to keep personal transactions separate. Once you obtain the Employer Identification Number, you can open a commercial business checking account. This is the beginning of proper record keeping and the foundation for creating your books and records going forward.


GREG KELLAR: If I have a separate bank account to track my books and records, do I need to have a CPA file my taxes?


TJ WILSON: You should have a CPA for accounting and tax needs and an attorney for legal and liability issues. Both professionals can work together to get your business set up and ensure ongoing compliance with tax filings and legal matters.


GREG KELLAR: When it's time to file my taxes in the spring, can I bring a shoebox to my CPA and they'll process my tax return? What do I need to bring?


TJ WILSON: You can bring a shoebox, but that will create a lot of work and a larger tax compliance bill. We recommend establishing accounting software and a general ledger to track transactions, both deposits and disbursements, so you have an accurate record of business activity for the year. That makes tax compliance and filing much more efficient.


GREG KELLAR: What type of accounting software do most of your other clients use?


TJ WILSON: For startup small businesses, QuickBooks is common because it's cost-effective and user-friendly. We also offer bookkeeping services for small startups and use a Creative Solutions accounting software product that is cost-effective and beneficial for small businesses. It's important to establish these systems upfront and have them documented and filed before you start operations.


GREG KELLAR: To summarize, I need to decide the business entity, file articles with the state, create an operating agreement or shareholder agreement, determine capitalization, obtain an EIN, open a bank account to record income and expenses, and look into applicable insurance. Did I miss anything?


TJ WILSON: You summed it up well. Working with a business attorney to set up legal structures and forms in tandem with your CPA would be ideal.


GREG KELLAR: TJ, thanks for joining us.

GREG KELLAR: To our listeners, thank you for listening. We hope this podcast provided insights into launching your small business and important considerations along the way. If you have questions, reach out to us at cbh.com/PCS.

GREG KELLAR: Please like, share, and subscribe, and stay tuned for our next Private Client Service Podcast, where we will cover topics such as ESOPs, entity selection, lessons learned from successful entrepreneurs, and more.