By Patrick D’Angelo, CPA
The first step toward launching your own business is having an idea. But even if you have an idea for a business, you may have no idea about the legal and tax obligations that await you should you put that idea into practice.
Here are several things to keep in mind before getting your startup off the ground.
Separate yourself from the business
Running your business through your personal bank account might seem easy and convenient, but unless you keep your business and personal finances separate, you could personally face financial liability. Consider forming a limited liability company (LLC), which gives you tax flexibility and protects you from being personally liable for debts or court judgments incurred by the company.
For startups, the benefit of starting and staying as an LLC vs. changing to a C corporation is the access you’ll have to funds; in a corporate entity, money is locked into the business, taxed at the business level and then subject to taxation when withdrawn. Another benefit of staying as an LLC is flexibility and flow-through treatment of the business losses, which can be deducted from your personal return, reducing your personal tax liability while you start your business.
Know the tax consequences of funding
One of the best ways to start is by getting a little help from your friends (or family), as this money will not be taxable to you or your business if it is a gift, loan or a contribution to join the business. But if you go outside your inner circle for financial assistance to get your business started, be aware of the possible tax consequences.
For instance, a majority of the funds received from the Kickstarter platform are considered sales revenue, which is taxable. If you opt to use Kickstarter, consider timing your project to make the tax hit less punitive. If you set it up in such a way that you receive the funds early in the calendar year, you’ll have all year to get your product in place and prepare for the tax bill. If you don’t receive funding until late in the year, you’ll be stuck with the bill before your product is generating expenses to offset the income.
Also know that crowdfunding platforms like Indiegogo are equity-based, meaning people are actually investing in your business, which can complicate things.
Identify the right accounting assistance
If your company operates in multiple states, regardless of whether you have a storefront or just an online presence, the term “nexus,” also called “sufficient physical presence,” applies to you. You may have to file and pay taxes in the various states in which you are doing business. An accountant can accurately assess your requirements to avoid surprise tax bills and help you create budgets and ensure you’re not paying more tax to the IRS and states than is required.
Patrick D'Angelo is an Audit Senior at Wiss & Company, LLP. If you would like to contact Patrick, you may reach him at firstname.lastname@example.org or at 973.994.9400.