a D.B.A. (doing business as)

a D.B.A. (doing business as)

Your county courthouse will issue you a D.B.A. This is done in person and cost about $20. Take a picture I.D with you they will ask to see it. You need the D.B.A .to open a bank account and to fill out the IRS application for your federal tax ID number. Get both of these early on as you will be asked for them a lot. The IRS issues Federal tax ID numbers for free, simply fill out the form (or on line)and send it in. See the IRS web site. A DBA is not required for corporations or a business using only your name. For example; a business such as Tom Smith Bookkeeper, would not need a DBA or a federal tax ID number.

A Bank & Credit Card Accounts

A Bank Account & Credit Card Merchant Account

Your bank account needs to be in your company's name. Set this up early on as your credit card processor will need the bank account information. All business expenses should be paid by check. The bank will need a copy of your D.B.A and your federal tax I.D. Number, (free from the IRS), in order to open your account. Get the lowest cost per month checking account they offer as it will be a while before you have much activity.

Choose a bank that can give you a merchant account to take credit cards and electronic check payments. Get all the information and approvals now so you are ready when the time comes. The banks sales person will walk you through the process.

You will need a credit card machine. Rent the machine as opposed to leasing it as renting cost less then leasing. Every time a customer uses a credit card or debit card to pay, you will be charged a fee. Do not worry about the cost of the fees at first. After you have been in business a while and have a track record, shop around for better rates.

A Phone & Fax Machine

A Phone & Fax Machine

Fax machines have become a requirement. You will need a two-line phone system at a minimum plus a fax line. You can start with your home phone but you will need a fax machine as most businesses fax information.

A cell phone and a computer or at a minimum an E-mail adresses are expected.

Accounting System.

Accounting System.

You will need a bookkeeping system. Any accounting system will do. Proper record keeping and review of the records is vital to the health of your business. Choose your method of record keeping, cash or accrual, and get it set up. You must do the required accounting work on a regular basis. If you will do this, you will find yourself making decisions based on the facts, with fewer errors. If you do not keep the books on a regular basis, you will find record keeping will drive you crazy.

Also see the section called IRS Reports & Accounting.

If you are new to accounting may I suggest you read a book like "simplified accounting" or "accounting for dummies". After you have operated your business for a few months, re-read that book and accounting will begin to make sense after about six months.

You might also consider starting out using an outside bookkeeping service. Your time is better spent working on growing your business. Bookkeeping services are easily found in the yellow pages and most CPA offices can recommend someone. You give them your expense receipts and check book once a month, along with your sales (income) and cost of goods sold numbers, and they return your profit and loss statement along with any paper work needed by the government entities. Cost is from $50 to $150 per month. You can wait until you get your first sale to start use their services.

You can also buy a simplified book keeping system - (see below) - at the local office supply store that works for simple businesses.

Cash basis accounting: In cash basis accounting you account for income when received and expenses when paid. As a general rule cash accounting is best for service type businesses and accrual for everyone else. The problem with cash accounting is that money owed you, and money you owe, is not accounted for until actually received or paid. This can give you a misleading picture of your business.

Accrual basis accounting: In Accrual basis accounting, you account for sales when sold, (invoiced or shipped), and expenses when occurred, (usually when you receive the invoice), not when you pay the invoice. All transactions have two entries, a debit and a credit. Total credits must equal total debits for the books to balance. If you sell a product, stock inventory, or manufacture a product, accrual accounting is the more accurate and detailed method.

Talk to your accountant about which method is best for your business. The choice is yours. You will need IRS permission to change accounting methods once you start using one or the other. The following bookkeeping record books are available at most office supply stores nation wide. I used them thirty years ago and they are still a valuable resource today. The books cost about $12.00 each.

Dome SIMPLIFIED BOOKKEEPING RECORD system
specially designed by a C.P.A.

600 - DOP - (UPC: 0 78509 00601) Weekly bookkeeping record book
11'' x 9''

612 - DOP - (UPC: 0 78509 00613) Monthly bookkeeping record book
11.25'' x 9.25''

http://www.missouribusiness.netÂ

This state asso. has good info for small businesses. Do a search for "financial controls" for a sensible explanation on P&L statements and balance sheets.
http://www.onlinewbc.gov/

See the SBA web site for more information on cash flow and other finance related subjects.

Business License

Business licenses are not required for most businesses. Some businesses require that the operators be licensed such as real estate brokers, hair dressers, attorneys, doctors, pharmacist and contractors, to name a few. Some businesses have to have the premises approved by the city or state, for example; nursing homes, day care centers and restaurants.

Regulation requirements are the first area to check into before starting a business. If you are not sure if a particular business is regulated, ask at your state comptrollers office or ask the venders who supply that industry. They will know. Do not let regulation discourage you as the rules also limit the number of competitors.

Form of doing business

Form of doing business

This is a brief outline of the different forms of doing business. Other then operating as a sole proprietorship I recommend you get a book on the form of doing business you are considering and read up on the subject.

Your choices of forms of doing business are.

1. Sole-proprietorship
2. Partnerships
3. Corporations

Sole Proprietorship:

A sole proprietorship is a single owner business. It is easy to set up because it does not require a special license from the government. You file your assumed name, (D.B.A.), with the county court house and you are in business. The bank will want your social security number, or federal tax I.D. number, to open a business checking account.

You are the owner and get to run the show . The profits or losses of running the business are yours. You report them on your individual tax return by filing a IRS schd. "C" income form used for a business or profession.

The disadvantage is that you are responsible for all the businesses losses, debts, obligations, and any judgments obtained against the business. To avoid surprises read all paper work very carefully before signing. Know what you are agreeing to and get advice if you have any doubts.

Partnerships:

A partnership consist of two or more people engaged in business as co-owners. A partnership can be set up like a sole-proprietorship by simply filing the assumed name certificate.

Most partnerships fail because of disagreements between the partners. A written partnership agreement can help avoid potential conflict. I highly recommend that you have a written partnership agreement and that a lawyer reviews it. Most states have adopted the uniform partnership act which requires filing at the county or state level. Your lawyer will make certain you have complied with state law and that all possible contingencies are addressed. A good book on partnerships, with partnership forms on disk, is available from nolo.com

Each partner pays income tax on the profits of the businesses based on their share of the partnership. The partnership files an information return with the IRS each year and gives each partner a copy showing the profits, or losses, that they well need to file with their personal return.

The Ordinary Partnership allows each member to share equally in the profits of the partnership, and each partner is personally liable for any of the debts assumed by the partnership. You can also agree on any un-equal percentage of ownership between the individual partners. The partnership is governed by the terms of the partnership agreement.

In a Limited Partnership one person is designated as the general partner, and runs the business, all other partners are limited partners. Limited partners management roles in the business are restricted, and their losses are limited to the amount invested. Limited partnership interest are considered securities, and federal and state security laws must be complied with. To avoid future problems good legal advice, and assistance in setting up the limited partnership is recommended.

The partnership files an information return with the IRS each year, and gives each partner a copy showing the profits or losses that they well need to file with their personal return.

Corporations:

A corporation is a legal entity. A corporation is set up under state law by filling a corporate charter with the secretary of state. Your attorney should set by the corporation.

The corporation is funded by the sale of shares to the stockholders and managed by the board of directors who appoint the management. The corporation, not the shareholders, own all of the assets of the corporation.

The advantages of a corporation are that it can secure capital and loans more easily. A corporation limits your liability for company obligations. Other advantages have to do with insurance and retirement accounts.

Disadvantages are that a corporation is a more expensive form of business to set up. Also the corporation pays taxes as a corporation and the owners then pay taxes on any dividends that are paid out (double taxation). Another problem is that the required record keeping can be quite extensive.

LLC Limited Liability Company. An LLC is a blending of the the limited liability of a corporation with the tax treatment of a partnership.State laws govern LLC's and the articles of organization are filled at the state level. Because of IRS rules covering LLC's, and state filing requirements as well as the need for an operating agreement and articles of organization, you should consult with your attorney when forming an LLC.

S- Corporations:

S corporations offer the same protections as regular corporations with the exception that the S corporaration does not pay income tax itself . Income passes through to your personal tax return, like it would with a partnership or sole proprietorship.

The advantages are that you avoid the double taxation of a regular corporation.

The disadvantages are that you are limited to 35 shareholders. The receipt of too much passive income, or foreign income, could affect the S corporation status. Foreign tax credits are not allowed and income earned is considered as dividend paid at years end. Net operating losses in excess of the adjusted basis of a shareholders stock value, or debts owed by the corporation to the shareholder, are not deductible. There are many more restrictions, and limitations attached to S corporations and you should consult a corporate CPA & your attorney before choosing S corporation status.

My Recommendation;Â Start as a sole proprietorship, if you can, as it simplifies the process and keeps the start up cost low. The main difference is one of taxes. In a sole proprietorship all losses and profits are taxable to you the year they are earned. In a corporation, the corporation pays the taxes and takes any losses and you are an employee of the corporation as far as the IRS is concerned. In a corporation you take money out by declaring a divided. Thus the income is taxed twice, once as corporate profits, and again as dividend income to the shareholders.

If getting sued because of your business actions is of concern to you, you will get sued anyway as the owner of the corporation if the corporation gets sued. Just buy the necessary liability insurance and don't worry about it. If you are concerned about what is the best business form to use, get a book and read up on what can be a bit of a complicated subject. If possible, ask your accountant or lawyer. Nolo Press at www.nolo.com has an excellent book & C-D covering this subject and other legal information about running a small business.

Sales Tax permits

Check with you state tax assessor collector (comptrollers office) for sales tax permit requirements. All retail businesses, and most service businesses, will need a sales tax permit. Wholesale businesses should have a tax permit as your venders will request it. The permit authorizes you to collect sales tax and remit it to the state. It also allows you to buy merchandise without paying sales tax when you are buying for resale. Your states sales tax office can provide you with the rules for collecting taxes in your state.

A deposit to assure compliance is most often required.

Internet and catalog sales are taxed if the seller has a nexus (agent, or location) in the state were the product will be used. Most states tax based on the ship to address.

Getting a sales tax permit is a simple process.

Occupancy permit or C of O

C of O

Most cities require an occupancy permit (C of O). Check with your local city hall. This permit assures that you comply with the fire and safety codes and that the premises are suitable for the type of business intended. When leasing space, be sure the lease can be canceled if you cannot get the occupancy permit.

Specail permits or Lic.

If yours is one of the businesses that requires a special license or permit, be sure that you can comply before leasing any space or buying equipment. If you have to have the space first, get a clause in the lease that lets you off the hook in the event you cannot get an operating permit or a C of O.

Restaurants will need a health inspection in addition to the other C of O inspections.

Goverment reporting and tax issues

IRS Reporting

When you are in business the government is your partner, like it or not. Besides the general reports and requirements that I have listed here, each business has reporting requirements specific to that type of business, which you will need to research. I hope you will get assistance with this from your bookkeeper or CPA.

The IRS has rules on how you must account for profits, losses, cost of goods, labor, and shipping cost, to name a few. I will cover these areas briefly so that you have some understanding of them.
Not To Worry!

Government Reports & Forms:

Do not let all this reporting overwhelm you! Most of this stuff will become routine and you will only deal with it a few times a year. Once your bookkeeping method is set up, concentrate on running your business. If reporting requirements is bothering you, get a bookkeeping service and let them keep you in compliance.

Most of the required reports can be found on the IRS web site. Most of the reports have to do with employees. Listed here are the main reports & forms you will deal with. If you use a book keeping service, they can handle most of this for you. Some CPA offices have a service to help keep you in compliance. The IRS has booklets on all of these forms and their proper use. http://www.irs.gov/ also see Helpful Links.

1. Monthly state sales tax report.

2. You must make quarterly IRS tax deposits if you have a profit.

3. Monthly tax deposits for employee withholdings. IRS form 941

4. Quarterly federal unemployment tax report. IRS form 940

5. Annual 1099, report for any sub contractors who earned over $600.

6. Annual W-2 report, on with holdings from employee.

7. Annual W-2, to employees.

8. Form W-4, employee-withholding instructions, keep on file in your office.

9. INS form I-9, Employment eligibility verification. You must have I-9s on file if you are audited.

10. Your state may have a new hire reporting rule, call the state atty. gen. office for your state an inquire.

11. Schedule C, for your profit or loss from a business or profession, to be filed with your federal tax return. (Sole-proprietorships)

12. OTHERS: State tax report, Corporation tax report, franchise tax report, depletion, farm & ranch etc. If you need any of these you should be using a CPA to keep you in compliance.

Information on starting a business, IRS forms, tax information for businesses, and more can be found ont he IRS web site

Profit & Loss:

In theory computing profit or losses is simple. Take gross income and subtract business deductions. The actual computation to arrive at the business deductions can be quite complicated. Some definitions.

Gross Income: All income coming into the business, sales, interest, rents received, commissions, and fees.

Net Income or loss: The difference between income and business deductions.

Business deductions: The IRS states that a business deduction must meet the following conditions to be a business deduction.

1. The expense has to business related (not personal) and incurred in the conduction of your business.

2. The expense must be ordinary and necessary. The expense must be such as is normally incurred by this particular type of business. The expense must be a business necessity.

3. The expense has to be for items used in business with a useful life of less than a year. Equipment, tools, machinery, furniture are not expenses but rather are assets that have to be depreciated.

4. The expense amount must be reasonable.

Business Use of Auto or truck:

Use of an auto or truck for business can be taken either as a standard mileage deduction or as actual cost of owning and operating the vehicle. The standard mileage method is much easier to use and usually more lucrative. You cannot deduct that part of the vehicle use that is personal or that involves commuting to and from work.

1. Keep a log of the use of the vehicle on a daily basis. Note the who, what, where, when, and why. In an audit the log will be invaluable.

2. For actual expense method you will need a detailed log of all expenses and copies of all receipts. Batteries, tires or any item with a useful life over one year has to be depreciated and the car as a whole is depreciated

3. Interest on the loan is also deductible.

4. For the standard mileage method, log the mileage every time you use the car for business. The law requires that you substantiate your expenses by keeping adequate records or by sufficient evidence to support your own statement. From The IRS.gov web site.
Topic 510 - Business Use of Car

If you use your car in your job or business and you use it only for that purpose, you may deduct its entire cost of operation (subject to limits discussed later). However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.

You can generally figure the amount of your deductible car expense using one of two methods: the standard mileage rate method or the actual expense method. Before choosing a method, you may want to figure your deduction both ways to see which gives you a larger deduction. For 2004, the standard mileage rate is 37.5 cents a mile for all business miles driven. If you use the standard mileage rate, you can add to your deduction any parking fees and tolls incurred for business purposes.

To use the standard mileage rate, you must own or lease the car. The car must not be used for hire, for example, as a taxi. You must not operate two or more cars at the same time, as in a fleet operation. You must not have claimed a depreciation deduction using the Accelerated Cost Recovery System (ACRS) or the Modified Accelerated Cost Recovery System (MACRS) on the car in an earlier year. You must not have claimed a Section 179 deduction on the car, and you must not have claimed actual expenses after 1997 for a car you leased. You cannot use the standard mileage rate if you are a rural mail carrier who received a "qualified reimbursement."

Further, to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.

However, for a car you lease, you must use the standard mileage rate method for the entire lease period. For leases that began on, or before December 31, 1997, the standard mileage rate must be used for the entire portion of the lease period (including renewals).

To use the actual expense method, you must determine what it actually cost to operate the car for business purposes. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to business miles driven. Also include garage rent, parking fees, and tolls attributable to business use.

Generally, the Modified Accelerated Cost Recovery System is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. However, if you use the standard mileage rate in the year you place the car in service, and change to the actual expense method in a later yea,r and before your car is fully depreciated, you must use straight–line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For cars first placed in service in 2002, the maximum depreciation for that car is $4,900, for 2003 it is $2,950, and for each succeeding year it is $1,775. These maximum amounts vary for cars placed in service before 2002. Also, the amount of the deduction is reduced if you use the car less than 100% for business. Multiply the maximum amount by your percentage of business and investment use to determine the deductible amount.

Bad debts:

You can deduct bad debts owed to the business if the debts were ordinarily recorded as income. You must keep a record of the debt in the event the IRS asks to see them.

Insurance:

You can deduct insurance for fire, theft, workman comp, business interruption, liability, automobiles used in business, bonds, group insurance and other business related insurance.

Personal health and life premiums have special rules on deductibility see the IRS web site for more specific information.

Freight:

Shipping cost requires special handling. Freight income that you charge a customer is recorded as income. The cost of shipping the items to your customer is a cost of goods or expense. Freight out is deductible.

Freight-in cost, on any repeatable assets such as equipment, gets added to the cost of the equipment and depreciated along with the equipment. For example, you order a new computer, the cost of shipping the computer gets added to the cost basis and depreciated over the three-year useful life of the computer.

Freight-in charges on merchandise gets added to the cost of the items and carried as part of your inventory assets. When the item is sold the shipping charges become part of the cost of goods sold or expensed at the time of the sale. For example, You sell widgets costing $10.00 each, it costs $10.00 per case of 10 widgets you bring in for a shipping cost of $1.00 per widget. The shipping cost of $1.00 each gets added to the cost of the widgets giving you a landed cost of $11.00 per widget. The same would be true of any duty or other shipping related fees.

A freight-in charge on consumables is considered an expenses item, and deductible when paid. For example, you order paper bags to put your customers purchase in, the cost of shipping is an expense because bags are consumed in the normal course of doing business.

Repairs Verses Improvements:

Repairs: You generally deduct the cost of repairing business property in the same way as any other business expense. However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Example; You patch a section of roof at your place of business. You deduct the cost of the repair as a business expense. However, if you completely replace the roof, the new roof is an improvement because it increases the value and lengthens the life of the property. You must depreciate it.

Improvements to rented property: You can depreciate permanent improvements you make to business property you rent from someone else. Example; you pay for leasehold improvements to make rented space conform to your use. You depreciate the improvements cost over the life of the lease.

If you improve depreciable property, you must treat the improvement as separate depreciable property.

If you build a new building you can depreciate the component sections or parts based on the useful life of the components rather than the normal life of the building as a whole. You will be asked to prove that the useful life of the component is less than the building as a whole. Hint: I always get a letter from my supplier stating the useful life of the component part I am installing. For example; when installing an A/C system the unit life is normally ten years, not the 39.5 years the IRS allows for the main structure. This method complicates the accounting but the tax savings can be considerable.

Travel:

Commuting costs are not deductible, but some local transportation expenses are. Deductible local transportation expenses include the expense of going from one workplace to another when you are in the area of your tax home. If your home office qualifies as your principal place of business, you may deduct the cost of going between your residence and workplaces in that business. You may deduct the cost of going between your residence and a temporary work location, trade shows, business education seminars, or other travel for other normal and customary business reasons. If you regularly work at one or more regular business locations away from your office, you may deduct the cost of going to a temporary work location or to see customers. Transportation expenses include the cost of transportation by car, air, rail, bus, taxi, etc.

Business entertainment expenses and business gift expenses may be deductible, but subject to certain limits. For information on business entertainment expenses, see the IRS web site.

You must keep records to prove the expenses you deduct.

Contractor? or Employees?

It is critical that you, as an employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus an IRS penalty.

Who is an Independent Contractor?

A general rule is, the person paying the contractor has the right to control, or direct only the end result of the work done by the independent contractor, and not the means and methods of accomplishing the result.
One of the tests the IRS will use to determine the independence of the contractor will be whether or not it is usual and customary in your industry to treat the worker as an in-depended contractor. There should be a written agreement between the parties.

A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.

Statutory Non-employees

There are two categories of statutory non-employees: licensed real estate agents and direct sellers. They are treated as self-employed for all Federal tax purposes and unemployment tax purposes.

Substantially all payments for their services as direct sellers are directly related to sales, rather than to the number of hours worked. Their services should be performed under a written contract providing that they will not be treated as employees for Federal tax purposes. This normally covers outside salespeople paid substantially on commission.

There is a form on the IRS web site to help you with this determination. More info on independent contractors and form SS-8 .

Depreciation:

Property used in a trade, business, or in an income production activity, can be depreciated. The property must be something that wears out or becomes obsolete and it must have a determinable useful life. The kinds of property that can be depreciated include, but are not limited to, machinery, equipment, buildings, vehicles, and furniture.

Depreciation is a complicated subject. I suggest you determine what is depreciation property, account for it as an asset, and then let your CPA handle the correct calculation.

Getting help & Forms:

The IRS web site is user friendly and makes checking out any subject fast and easy. From starting a business questions, record-keeping rules to tax forms and compliance the IRS web site will help you keep up to date.

IRS Reporting:

Visit the IRS.gov web site for reporting information on businesses

Business Information Links

The US Government printing office is a great source for all kids of business publications.

http://www.pueblo.gsa.gov
Federal information center: Go to Small Business.

What makes successful people different, is how they spend their days.