Starting a Business - Checklist for Getting Started

1. Whether you are going to own and operate a business that will have employees and multiple clients or you are going to take on a big project for one company as an independent contractor (a.k.a., contractor, freelancer, subcontractor), you are starting a business!
   
   We have put together the following information in somewhat of a checklist format. The coverage of the items is very high level. Should you need further information or assistance related to anything included below, consider scheduling a consultation to discuss the specific items and how they relate to your specific situation.

2. Research the type of business you want to start. What are the products and/or services that you will offer? Who will your customers be? Who are your competitors? What will set you apart from the competition? These are just a few questions that you will need to answer.

3. Select the legal entity type for your business. The most common legal entity choices for small business are: Sole Proprietorship; Partnership; Corporation; and LLC (Limited Liability Company). There are pros and cons for each entity type. Additionally, each is different in terms of how it is treated for tax purposes and there may be multiple tax treatment options to choose from (e.g., C-corporation vs. S-corporation). Which legal entity type and corresponding tax treatment is best for you? It comes down to the facts and circumstances of your situation. Just because your business may seem to be similar to someone else’s does not mean the same entity type is best for your business.

4. Take care of initial filings, licenses, and permits! Which ones are required? It depends on the type of business, where you will be doing business, and a variety of other factors. The following are a few examples of such things that you should consider:
   
   Trade name registration – If you are a sole proprietorship and you are using a name other than your own, you need to register your trade/fictitious name with the Secretary of State’s office. In some cases, partnerships, corporations, and LLCs may need to register trade names as well.
   

Corporate or LLC filing with the Secretary of State.
Registration with professional associations/organizations (that govern work for your field/profession). For example, the work that we do as a CPA firm falls under the rules established by the Accountancy Board and, accordingly, our firm must be registered with that agency and maintain that registration.

Vendors License. If the product or service that you will be selling is subject to sales tax, you need to get a vendor’s license. Generally, tangible personal property is subject to sales tax. Some services (e.g., landscaping) are subject to sales tax while others are not (e.g., accounting and tax services). There have been many changes in this area, so if you are not sure if this applies to you, then you need to find out!

General business licensing requirements: Check with zoning department for the city that your business is located in. If you will be doing business in multiple cities, then you should check with those cities as well.

Other licenses: e.g., liquor license – These are dependent on the type of business and other factors – do your homework! One source of information - check with other similar businesses that are well established.

Permits – Alarm systems, signs, commercial zoning, and occupancy permits are just a few examples. Again, do your homework to include checking with your local zoning department.

County Return of Taxable Business Property, New Taxpayer. This is a mandatory filing that many small business owners miss. It must be filed within 90 days of starting your business and is required even if you may not be required to file on an annual basis thereafter. ?

Tax Consequences of Being Self-Employed/Being a Business Owner
The following are just a few tax consideration for you to be aware of….

Self Employment Tax – Applicable to those taxed as sole proprietors and partners, this tax is the equivalent of the FICA (Social Security and Medicare) tax. When you are an employee, 7.65% is withheld from your gross pay for FICA tax. Your employer matches that amount for a total of 15.3%. When you are a sole proprietor or a partner, you pay the entire 15.3%.

Estimated Tax Payments – The Federal income tax system is a “pay as you go” system. When you are an employee, taxes are withheld and sent in by your employer. When you are self-employed or otherwise have tax liability for which there is no withholding (or is underwithheld for), you need to remit income tax (and self-employment tax, if applicable) throughout the year via quarterly estimated tax payments?

Use of Workers
Employees and/or Contractors. The proper classification of workers as either independent contractors or employees is very important. There can be very serious consequences for not doing. See our related article “Independent Contractor vs. Employee.” ?

Employees, Payroll, and Payroll Taxes.
If you will have workers that are classified as employees, you are an employer which significantly increases your responsibilities as a business owner. It can be overwhelming if you have no experience with payroll and human resources/personnel (e.g., hiring, firing, etc.) matters. We strongly recommend that you either outsource your payroll or gain a thorough understanding of what you need to do. Here are just a few things you need to become familiar with:

The payroll process in general, wage and hour law (e.g., when overtime is required), payroll taxes and related filings.

Getting set up with agencies as an employer and remitting payroll taxes and filing payroll tax returns.

Employee related paperwork – tax withholding forms, verification of eligibility for employment, new hire reporting, and more!

Checking out prospective employees before you hire them. ?

Independent Contractors.
These non-employee workers and service providers go by many names, which include, but are not limited to, freelancers, spot laborers, and subcontractors. It is very important before you start using independent contractors that you know what to do to support your position that your workers are independent contractors. See our related article “Independent Contractor vs. Employee.”? o o

o Income Taxes & Other Filings (most common ones)
o Income Taxes – Federal, State, Local, School District
o Quarterly estimated income tax payments
o County Personal Property Tax
o Sales Tax
o Use Tax
o Accounting and Tax Considerations
o Basis of Accounting – accrual or cash
o Tax year vs. calendar year
o Sales/services rendered in various locations
o Home office deduction (may not apply if your business entity is other than a sole proprietorship)
o Working in multiple cities and/or states
o Depreciation of furniture, fixtures, equipment, vehicles, etc.
o Amortization of start up costs, organizational costs, and intangible assets (e.g., patents, copyrights, goodwill)

Essential Professional Services.
Most small businesses fail within a few years of when they start. It is essential that a new business owner does his/her homework prior to starting the business and has a team of key professionals that he/she has established a working relationship with to cover his/her bases when it comes to business issues outside of his/her area of expertise. Unfortunately, many new small business owners and self-employed individuals avoid using the services of professionals such as accountants or attorneys because they think that they are saving money. Using such professionals allows the owner to focus his/her efforts on what he/she does best which in turn generates revenue. Additionally, by having tasks such as tax return preparation and payroll processing handled by a professional, the owner can avoid penalties and interest and minimize his/her tax liability. Furthermore, there is the peace of mind that things are being done right. The following are the professional service providers that we recommend that you consider using.

o Accountant – guidance on and assistance with financial and tax matters to include such things as bookkeeping, financial statements and reports, payroll processing, and income tax preparation, consultation and planning.
IMPORTANT: Tax-related problems is the of the biggest and common problems that we see that gets small business owners into trouble and often leads to them going out of business.

o Attorney – guidance on and assistance with legal matter to include such things as forming legal entities, operating agreements, non-compete agreements, buy-sell agreements, etc.

o Insurance Agent – secure appropriate insurance coverages – professional liability, errors and omissions, contractors liability, general liability, business vehicles, premises and contents, business continuity, etc.
IMPORTANT: Did you know that your homeowner’s and personal auto insurances probably will not cover your business use of these items?

o Banker – not only for your business checking account, but investment products, loans, and much more.
IMPORTANT: You should have a separate checking account for your business. It is important to keep your business and personal financial records distinct and separate from one another!

Other Services. Keeping costs down is always important, but is even more important to the new business owner. For some services, you need to weigh the value of your time and the associated lost revenues against the cost of paying someone else to do things that do not fall into your areas of expertise.

o Financial Planner – establish retirement plans, investments, and more
o Payroll Processor – if you accountant does not offer this service
o Health Insurance/Employee Benefits
o Technology/Computer Consultant
o Website Design & Hosting
o Affiliations/Memberships/Networking. Getting your name out there is essential to the success of your business. A few examples of organizations that you can check out:
o Local chamber(s) of commerce
o Better Business Bureau
o Professional and trade organizations
? Some things that we strongly recommended to avoid common problem areas:
o Keeping business and personal finances distinct and separate! This is essential if your business is an LLC or corporation as this is one problem area that could invalidate your limited liability protection.
o Keeping a mileage log to substantiate the deduction for the business use of one’s vehicle.
o Retaining receipts and keeping complete, well organized records.
o Keeping bookkeeping, accounting, and tax records up to date.
o Filing tax returns timely and/or paying income and/or payroll taxes timely.
o Proactively (as opposed to reactively) seeking professional advice/guidance on topics and issues outside one’s area of expertise.

Do you need guidance or assistance in regards to any of the above topics or any other matter related to starting your new business? We offer a complimentary consultation to prospective new business clients. For more information, give us a call at (773) 728-4546 or (847) 401-5415 or send us an e-mail.

Independent Contractor vs. Employee
The proper classification of workers as either independent contractors or employees is a problem area for many small businesses. There can be serious consequences for misclassification, which may include, but not be limited to, payment of back payroll taxes and insurance premiums, fines, penalties, and interest.
In a nutshell, the amount of control that the company exercises over a worker is what determines if the worker is an independent contractor or an employee. Here are a few questions to help determine the status of a worker:

• Is the company providing the materials and supplies used to perform the work?
• Is the company providing the tools and equipment used to perform the work?
• Does the company set the worker’s hours/establish the work schedule?
• Does the company supervise the work?
• Does the company provide training?

If you answered yes to a few of these questions and the worker is not classified and paid as an employee, then you may have a problem.

A complete list of questions used by the IRS to determine the status of a worker is included on their Form SS-8, Determination of Worker Status. You can use this form to have the IRS determine the status of a worker or group of workers or you can use it for reference purposes.
If you are using independent contractors, you should be exercising due diligence in obtaining correct information when securing the services of independent contractors and other payees subject to be issued Forms 1099-MISC. Such due diligence should include obtaining Forms W-9, Request for Taxpayer Identification Number and Certification, before you start using a subject payee(s) or shortly thereafter. A recommended procedure is to obtain a Form W-9 from each individual (who is not an employee) and company that you make payments to. This will ensure that you have the needed information on file. Additionally, the payee indicates on the form the payee’s entity type (e.g., sole proprietor, corporation) which is necessary in determining if a 1099-MISC should be issued.

Furthermore, we recommend (not required) verifying the information on Forms W-9 by inspecting an item of identification and a social security card/tax ID information and photocopying such items inspected for your records at the time you begin using the services of a individual/business that you may be required to issue a Form 1099-MISC to.

When using independent contractors and subcontractors, we strongly recommend the use of independent contractor agreements and obtaining proof of workers’ compensation and other liability insurance(s). These additional measures will be helpful in establishing whether or not a worker is truly an independent contractor as opposed to an employee as well as minimizing your liability risk.

It is very important to understand that the items of paper “evidence” described above are in and of themselves not absolute proof in the event the classification of a worker is in question. Facts and circumstances may be carefully reviewed and scrutinized by the relevant agency or agencies.