Entrepreneurial

from Reuters Money:

Self-employed? When to graduate from sole proprietorship

Marla Brill

Jun 8, 2011 11:34 EDT

When Darin Edmonds started Waterproofing Solutions, Inc. earlier this year he knew making a go of it wouldn’t be easy in a struggling economy. But he was determined to get things off on the right foot, and to him part of doing that was putting a wall between his personal and business assets by setting up a Subchapter S Corporation.

“When I began in this business 21 years ago it was okay for me to start out as a sole proprietor. At this stage in my life, when I have personal assets to protect, that’s no longer a sensible option,” says the 46-year-old Corona, California, contractor.

Whether they are running a small side business, investing in real estate, or are established professional service or trade professionals like Edmonds, go-it-alone, self-employed individuals typically start out as sole proprietors because it’s easy and relatively uncomplicated. Under a sole proprietorship -- or general partnership if there is more than one owner --a business can get started simply by hanging out a shingle.

By contrast, while separate business entities such as limited liability companies or Subchapter S Corporations can shield personal assets and offer potential tax benefits, they also come with more paperwork and cost. Edmonds paid nearly $3,000 to have a legal professional set up his corporation and file the appropriate paperwork with the state, and will need to pay state annual fees as well. His accounting costs are also likely to be higher. “The peace of mind is well worth it,” he says.

Not everyone needs to form a separate business entity, says Johanna Sweaney Salt, a certified public accountant and partner at Kaufman Schmid Gray & Salt in Claremont, California. “There isn’t a lot of trouble a portrait photographer can get into, and there is always professional liability or umbrella coverage as a backup,” says Sweaney Salt, who nonetheless cautions that people should consult an attorney on such issues. “A lot of business owners complicate things when they really don’t have to.”

Others believe that those who don’t cordon off business and personal assets face a potential legal minefield, even for seemingly low-risk businesses.

“Let’s say you’re a sole proprietor owner of a printing shop who sends an employee out to get some office supplies,” says Phoenix, Arizona attorney Richard Keyt, whose firm sets up an average of over 450 businesses a year, most of them LLCs. “If that employee runs a red light and hits someone, your personal assets could be used to satisfy any legal judgment.”

It’s Tax Day: Do you know where your tax return is?

– Kelly Phillips Erb is a small business owner and practicing tax attorney at the Erb Law Firm in Philadelphia. She is also the author of the popular Tax Girl blog. The views expressed are her own. –

Chances are, you’ve already filed, as only a third of all tax returns are filed during the last week of tax season. But if you haven’t, keep these tips in mind:

- Postage rates for large envelopes went up yesterday (yes, yesterday). If you’re mailing your return – and it’s a big one – make sure to allow extra time at the post office.

- A number of post offices will be open to accommodate last-minute filers. You can find a list of those offices open past 6 p.m. EDT here (downloads as a pdf). You can also find a post office by location on the USPS website.

- You can also use a private delivery service to file your tax return or extension. The IRS considers the following private delivery services as acceptable to meet the timely filed rule: DHL Express (DHL): DHL Same Day; Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First; United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

- You may also e-file your return in order to file on time.

- If you need to file for an automatic extension, use federal form 4868 with the IRS. You can download the form and mail it in by the deadline or file electronically using your tax software.

What is tax deductible for small business?

– Stephanie Rabiner is a contributor to FindLaw’s Free Enterprise blog. FindLaw is a Thomson Reuters publication. This article originally appeared here. –

There is no definite answer for those of you who wish to know just what is tax deductible for a small business.

According to the painfully dry tax code, a business may deduct all expenses that are ordinary, necessary and reasonable.

Just what does that mean? Think about expenses that are helpful, appropriate and common in your line of work. Oh, and they can’t make you laugh.

Internal Revenue Service Code section 162 provides a list of what is tax deductible — including travel, meal and entertainment expenses — under the ordinary and necessary clause. It, however, is not exhaustive, leaving many expenses to your interpretation.

If you have a business expense not covered, you need to ask yourself whether it’s ordinary and necessary. Consider whether it’s directly related to your business or an expense common in your trade. Also think about whether it helps your business make a profit and continue operating.

If you’re unsure, try what is known as the “laugh test” — can you put the expense down without laughing at yourself?

Common budget mistakes for tech startups

– Ed Buchholz is the co-founder and CEO of 60mo, a cloud-based financial services company catering to small business owners. The views expressed are his own. –

Most everyone is familiar with the cliché: more money, more problems. But what if the problem is money?

Keeping your tech startup solvent requires the avoidance of several common budget mistakes. A budget or lack thereof can make or break a startup. Keep your overhead intact by doing the following:

Have a budget. Money should not disappear from your bank account into a fiscal black hole. At my last company, we were spending money but didn’t have an accurate view of where it was going. This experience is actually the primary reason my new company’s product, 60mo, exists. Organize expenses and revenue in whatever way works for your company. Make a cash flow plan. Keep current and accurate financial statements and analyze where you can trim the fat. Having a good budget is the beginning to avoiding common problems because it’s the common sense barrier between you and wasteful overspending. Avoid the first common budget mistake and actually create a budget.

Negotiate with vendors. If you are purchasing goods or services from others regularly, make contact and drive down the price. Negotiating will build important relations and reduce costs that are otherwise eating through your overhead. Vendors want your business and will offer discounts to get you to become a recurring customer. Remember even if you are purchasing online, someone somewhere is operating the site and might be willing to cut you a break if you take the time to contact them. At 60mo, we make the effort to reach out to all of our major vendors and establish a friendly relationship. It won’t always work, but its good business to at least try. Sixty percent of the time it works every time.

Minimize discretionary spending. In 60mo’s earliest days, we had a tendency to splurge on dinners out with the team whenever we had something to celebrate. When we started using our own product, we began to understand exactly how much those “team-building” meals were adding up. New businesses hemorrhage funds for unnecessary dinners, travel, and swag when they don’t have a clear budget and insight into their spending. The point of having a budget is to avoid waste. Be mindful of an expense’s worth, and your company will be worth more.

Plan for the future. Only focusing on the past and present gives companies a narrow image of what is going on inside of their finances. Think of accounting and dashboard tools as rear-view mirrors, they only show what’s behind you. Financial forecasting tools act as a GPS to get you where you want to go. By planning six months to five years ahead a company can strategically spend and save. With these tools one can manage liquidity, net present value, and project cash flow. For my business, I have a full five-year forecast with projected employee hires and “what if?” scenarios that allows me to be prepared for any situation. By thinking to the future you improve your present.

The right way to do home office deductions

– Stephanie Rabiner is a contributor to FindLaw’s Free Enterprise blog. FindLaw is a Thomson Reuters publication. This article originally appeared here. –

Some people believe that home office deductions are akin to begging the IRS to audit your taxes. While this can be true in some situations, home office tax deductions, if done properly, are completely legal and can provide a big payoff.

So if you work from home, consider the following tips. Home office tax deduction rules are a bit tricky, but with a little forethought and attention to detail, you should be just fine.

Home office deductions are attached to the percentage of your home that is used for business purposes. Therefore, the first thing you need to do is figure out, with respect to square footage, the percentage of your home designated as an office.

To take the initial tax deduction, the IRS requires that you use the space exclusively and regularly as either (a) your principal place of business; (b) a place to meet with clients; or (c) if the office is a separate structure, in connection with your business.

Once you meet these requirements, the home office tax deductions start flowing.

5 small business tax writeoffs for 2010

– Jason Beahm is a contributor to FindLaw, a Thomson Reuters publication. This article originally appeared on FindLaw’s Free Enterprise blog. –

Small businesses can always use a few good tax writeoffs. So we recently came up with 5 tax writeoffs for 2010. Let’s jump right in:

Create jobs, get a deduction

If you hired new workers between Feb. 3, and Dec. 31, 2010, that didn’t merely replace people who left and who had been unemployed for more than 60 days, you can save 6.2 percent of your payroll tax. You can also get another $1,000 business tax credit in 2011 if you keep the new employees for 52 weeks or longer.

Use a cellphone, get a deduction

Cell phones were considered “listed property,” which is an item purchased for work or provided by an employer but that can be used for personal use, but only if you properly tracked them. As long as you kept track of their relative use, you could deduct the expense proportionally. But now if you provide your employees with cell phones or if you use one for business, you can now write it off directly.

Buy new equipment, get a deduction

You’re getting audited – now what?

– Charley Moore is the founder and chairman of Rocket Lawyer Incorporated. He advises both early stage companies, large enterprises and their investors on strategic partnering and corporate development strategy. The views expressed are his own. –

Getting a letter from the IRS is enough to instill fear and trepidation in the minds of many small business owners. Opening the envelope to reveal a tax audit notice can be the thing of nightmares. After the panic attack subsides, there are things you can and should do to prepare for a tax audit. It doesn’t have to be as intimidating as it sounds, as long as you take it step by step.

1. Find out specifically why your return is being audited.

While the IRS is supposed to tell you why your return was selected, if they don’t, it’s up to you to ask. Your taxes can be audited for a variety of reasons:

• specific activity on your return, such as cash wages, 1099 and W-2 forms that don’t match your reporting, high deductions relative to your income, reports inconsistent with previous years, etc.
• related examinations, where your report involved transactions with someone else who is being audited
• automatic flags, where computer programs find outlying “scores” on returns (ex: above average withholding)
• random selection

Once you know what you’re being audited for, you can narrow your focus and start gathering the relevant documents.

2. Find out how the IRS is conducting your audit.

10 small business tax mistakes that will cost you

– Donna Fenn has more than 20 years experience writing about entrepreneurship and small business trends. She is the author of “Upstarts: How Gen Y Entrepreneurs are Rocking the World of Business and 8 Ways You Can Profit From Their Success“. This article originally appeared on BNET. The views expressed are her own. –

There’s not an entrepreneur on the planet who likes thinking about taxes. I know, it’s only February, so you’re likely still in deep denial about April 15. But it’s time to get organized. Almost every aspect of your business has tax ramifications and if you don’t know what they are, you’re inviting trouble down the road (can you say “audit?”).

For tips, I recently spoke to Sandy Botkin, a CPA, attorney, former trainer of IRS attorneys, and the CEO of The Tax Reduction Institute in Germantown, Maryland. He’s also the author of “Lower Your Taxes — Big Time 2011-2012”. Botkin shared 10 common tax misconceptions that both fledgling and experienced small business owners are guilty of. How many of these phrases have you uttered?

1. “I can do it myself.” “Most small business owners do not have the tax knowledge they need to stay out of trouble, but they won’t pay for planning,” said Botkin. “They’re cheap so they use TurboTax. But TurboTax won’t represent them if they get into trouble.” Sure, as a member of the profession, Botkin has a vested interest in recommending that you hire a CPA. Maybe you really are capable of doing your own tax planning. Maybe you can also rewire your office, build your own website, and represent yourself in court. That doesn’t mean you should. Just sayin’.

2. “I keep my receipts so I don’t need a tax diary.“ Every small business owner must keep an accurate tax organizer, said Botkin, and it’s not the same thing as an expense log. “A tax organizer has all the questions that the IRS requires you to answer about travel, entertainment, and other expenses. It will bulletproof your records and eliminate procrastination, and if you’re audited, it shifts the burden of proof to the IRS,” he said. Anything that allows you to feel smug in the presence of an auditor has got to be worth its price, which is not cheap in this case. You’ll spend over $100 for a decent tax organizer/diary.

3. “Yay! A big fat refund.” Many people are thrilled when they get a big check from the IRS. Wrong reaction, said Botkin. “A refund means you’ve given the government interest-free money for a long time,” he said. “If you have withholding, you want to adjust it to the point where you get very little refund.”

4. “I’ll just borrow a little from employee withholding.“ When they’re short on cash, it’s often tempting for small business owners to dip into the trust fund that’s used for employee withholding and Social Security. “Many employers think ‘this is my money,’” said Botkin. “It isn’t. If they borrow from withholding or Social Security, they are personally liable, with huge potential penalties.”

from Reuters Money:

Kill the mortgage deduction and give it to entrepreneurs

John Wasik

Feb 11, 2011 11:06 EST

Somehow I don't think President Obama had the home-mortgage interest deduction in mind when he mentioned the U.S. tax code before the U.S. Chamber of Commerce this week.

Yet winding down and eliminating this write-off for homes would be good for business. It's unfair, doing nothing to revive the housing market and can be put to better use shifting it to entrepreneurs to create jobs.

Most of the job creation in the U.S. economy comes from small businesses, which typically have no public shareholders to sate and are not primarily interested in fattening pay packages of overpaid executives.

The home mortgage deduction needs to go because it doesn't make housing less expensive, either. If anything, it makes homes more expensive because the subsidy inflates prices. Most homebuyers don't even itemize to take advantage of it. Nixing it would make homes more affordable.

As Alan Mallach, senior fellow at the Center for Community Progress, wrote in this space: "It is one of the most regressive parts of the tax code, since it affects all house prices, including the price of houses bought by lower-income home buyers, who rarely itemize and get little benefit from the deduction."

Mallach cites one study found that "barely 10 percent of homeowners earning less than $30,000 take the deduction, but they pay higher prices for their homes to benefit more well-off homeowners. On top if this, it is projected to add $120 billion to the federal deficit next year."

Will getting rid of the write-off deep-six the already flagging U.S. home market? Mallach noted that Italy pared its residential housing deduction in 1992 and maintains a higher home ownership rate than the U.S.

Top 5 changes for small business in 2011

– Jason Beahm is a contributor to FindLaw’s “Free Enterprise” blog. FindLaw is owned by Thomson Reuters. –

The cliche is true: the one constant is change.

This year a series of regulatory, compliance, and legislative changes will occur that will affect small business owners. Paychex, Inc., recently put together a list of the most influential business regulations in 2011. We narrowed the list down to five that we found the most interesting.

1. Tax changes – In 2011, taxes are going to get even more complicated for small business owners. (What did you think, it was going to get easier?) However, as a plus, there will be a retroactive extension of some of the tax incentives that expired at the end of last year.

2. Healthcare reform – Obviously healthcare reform is going to have a big impact on small businesses in 2011. Under the reform, small businesses will receive tax credits to purchase health insurance. Health plans that existed on or before March 23, 2010 will be grandfathered in, but you cannot make any significant changes to the plan.

3. Employment law – There is going to be an increase in measures requiring greater transparency to workers on the wages they are owed. Specifically, there will be an emphasis on minimum wage and overtime requirements laws.

4. Federal Trade Commission requirements – Twitter, LinkedIn, Facebook, StumbleUpon, blogs… they all are areas lacking regulatory guidance. The FTC is looking into creating a “Do Not Track” tool for the Internet, based on the concept of the “Do Not Call” registry.