Tuesday, February 12, 2008

Business Formation and Taxes

If you're forming a business, you should think about all the reporting and tax ramifications you'll be facing before chosing the form of organization. Cliff Ennico, an attorney, TV host, lecturer and friend of mine, has posted information about the various business forms on his Web site: http://www.cliffennico.com/downloads/DemystifyingTheBusinessOrganization.pdf
His main site is: www.cliffennico.com.

His "Demystifying the Business Organization" provides a great overview of the pros and cons of the different business forms. Read it over, take notes and then go to your own attorney or accountant and ask them for their advice. If you read Cliff's notes first, you'll be able to ask more intelligent questions, thereby using less of your professional's valuable time.

In a nutshell, if you just have a small business that you're running yourself, you can be a sole proprietor and file a Schedule C for your business income along with your personal tax return. If you want to protect yourself from liability, the LLC (Limited Liability Company) is very popular. Again, the business income flows into your personal return. If you want more formal structure, and you think you'll be selling shares in your company to investors, then a "C" Corporation is the way to go. But your corporation will pay taxes on its income. You'll pay taxes on your salary or dividends that the corporation pays to you. (Note: I'm not a lawyer or accountant, and this is not legal or accounting advice.)

The most important thing is to keep track of your business transactions. Don't get them mixed up with your personal money flows. While many people use QuickBooks, I prefer to use Excel. The beauty of Excel is that I can update my records and easily recalculate the totals. I have neat printouts to use at tax time.

Many people believe that they can just gather their information at the last minute and hand it over to accountants at tax time. But I believe that it's much more prudent to keep track of your money yourself so that you know what is going on. Accountants can make mistakes. Do your own due diligence. Know what records you need to keep and then keep them.
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