No one tells you about all the paperwork that comes with starting a business. On top of hiring new employees, developing your business plan, and figuring out if you should be making TikTok dances to promote your Grand Opening, there’s a whole new world of financial and legal complications to consider. It can sometimes feel like you need to be a lawyer, accountant, real estate mogul, and HR specialist, all at once.
The reality of the startup phase is that all these early details can impact the trajectory of your business’s growth. And with only about a third of small businesses ever making it to their 10th year, it’s important to take every advantage you can early on. A financial advisor can develop a plan to manage cash flow, reduce taxes, protect you from liability, and build wealth.
Taxes
Your choice of entity is one of the most important decisions early on regarding the business and taxation of your newly founded company. It determines whether your business is taxed at an individual level or entity level, and whether income flows through. It also determines the nature of income from your business: is it self-employment income, W-2 income, or some combination of the two? Entity type will also impact how losses are handled, as well as taxes on the disposition of the business down the road. Deductions must also be considered, keeping in mind the varying levels of liquidity, income, and debt in your business.
Types of Tax Entities
One owner. There is no separate business identity. Owner is responsible for unlimited personal liability, and both self-employment tax and personal tax.
Business entity between 2+ people who each contribute to the business and share in the profits and losses. Owners are responsible for unlimited personal liability and self employment tax (unless structured as a limited partnership). They are responsible for personal tax regardless.
Limited Liability Company (LLC) protects owners from personal liability. Profits and losses can get passed through to personal income without facing corporate taxes. However, members of an LLC are considered self-employed and must pay self-employment tax contributions. They are also responsible for either personal or corporate tax.
C Corporations are a legal entity that is separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. The corporation is responsible for corporate tax.
S Corporations are a special type of corporation designed to avoid the taxation drawback of regular C corps. S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates. There are special limits on S corps. S corps are responsible for personal tax.
The good news is that if you aren’t sure that you picked the best entity for your situation, you can apply for a change. Many companies do eventually change entity selection as they grow and develop.
Estate Planning
If you are a start-up and your net worth is $2m or less, the good news is you generally will only need 3-4 documents: A Will, Power of Attorney, Health Care Directive, and Beneficiary Designation.
A Will specifies how/when and to whom you want things to go, naming an executor to carry out your wishes, and specifying guardianship of your children. A Power of Attorney gives someone else the power to make your financial decisions in the event that you’re sick or incapacitated. A Health Care directive can be a separate document or may be included in the POA, depending on the state and attorney. Again, if you are unable to make your health care decisions, this document names the person or persons you have chosen to make those decisions for you. Finally, Beneficiary Designation is the most common on life insurance and retirement accounts. Make sure they are current and up to date. Special consideration and planning may be needed if your beneficiary is a minor.
Investing
When you are working hard to get your business off the ground, the best thing you can do for your net worth is KEEP IT SIMPLE. Make sure you have access to cash, reinvest in your business, and find a way to own your space.
Often, what this will look like is a line of credit that covers 6-12 months of operating cash (LOC). Any reserves should be put into a money market account, and extra funds should be reinvested in your business.
If it makes sense for your particular business, owning your site may also be beneficial. Consider rent-to-own buildings to avoid a high cost upfront and use value-add strategies to increase income and resale price. You can also consider a mixed-use property to combine residential and commercial cash flow.
The 8th Wonder of the World
Don’t forget to take advantage of compounding interest!
While it is important to reinvest in your business, it is also critical to save for your personal future. Set aside money for retirement in a Simple IRA or Roth IRA.
Investing $10,000 every year from age 20 to 40 would turn a $200k initial investment into a $5 million retirement account on your 70th birthday. (Assuming an 8% rate of return.)
I can’t over-emphasize the impact that the startup stage has on the future of your business. Failing to protect your assets or mismanaging cash flow can lead to expensive consequences as your company grows. On the other hand, making well-informed decisions early on can help jumpstart growth and promote expansion.
At the beginning, nobody has it all figured out. But having the right professional team in place can help you be intentional with early decisions and navigate the challenges of owning a small business. Not sure where to get started? We’re here to help!
Melissa Bane, CPA, PFS®, CFP®, ChFC
Senior Private Client Advisor
As a Senior Private Client Advisor, Melissa’s top priority is to serve her clients. Her proactive approach blends thirty years of industry experience with compassion and understanding. She specializes in developing holistic financial solutions for business owners and helping women investors establish security and build wealth.
The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.
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