By Ann Marie Casinelli, CPA
Many people make the transition to a new business slowly, retaining their full time position with their current employer and starting their venture on the side until it takes off. Regardless of what your new business does, consider these tips:
1) Hobby or business?
Certain guidelines can determine whether an activity is a business or a hobby (an activity not engaged in for profit). Taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is appropriate for the business. An activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year. If it does not, you may be subject to audit and some of the deductions taken in previous years may be disallowed.
2) Pick a name!
Choosing a business name is an important step. You need to ensure it is properly registered and protected. Also consider whether it’s web-ready (availability of domain name). If you intend to incorporate your business, you’ll need to contact your state filing office to check whether your intended business name has already been claimed and is in use. If you wish to start a business under any name different than your real name, register a doing business as name (DBA).
3) Apply for a Federal Employee Identification Number (EIN) with the IRS.
An Employment Identification Number (EIN), also referred to as a Taxpayer Identification Number, is a unique nine-digit number assigned by the Internal Revenue Service (IRS) for tax reporting. It’s like a Social Security Number, except that it is for businesses. Corporations and partnerships are required to have an EIN. However, if you are a sole proprietor, the IRS does not require one. You can use your Social Security Number and report your income and expenses on a Schedule C tax form. However, many sole proprietors still elect to use an EIN because it reduces the chances of identity theft and banks often require one to open a business account.
4) Consider registering as a Limited Liability Company (LLC).
If your business interacts with anyone, consider forming an LLC for your business. By doing so, you are reducing risk surrounding your personal assets. When you operate as a sole proprietor, your business is part of yourself. If your business gets sued, you personally are being sued and all of your assets are at risk. The limited liability company was created as a way to encourage business ownership and business activity. When you form an LLC, you are creating a separate entity to be your business. It is a separate legal entity from you the owner. If an LLC business becomes liable for an obligation, the owners of the LLC are not personally liable as they would be if the business were a sole proprietorship.
5) Open a bank account.
For a business to function properly, and in order to maintain the protection of your personal assets, you must separate your business and personal finances. If you are sued, the party suing you can go after all of your assets (business and personal).
6) Keep good records.
In order to monitor your businesses’ progress, identify income, keep track of deductible expenses and prepare your tax return, you need good records. Keep your business records readily available for IRS inspection. If the IRS examines any of your tax returns, you may be questioned on items reported.
7) Engage a CPA.
A CPA is available to answer questions, deal with complicated forms, file quarterly forms and prepare business tax returns. An accountant can advise on what kinds of business expenses are deductible. Most of these rules and regulations are moving targets, changing frequently and varying from state to state. A good CPA will always be on top of changing laws and regulations and keep you updated.
Editor’s note: Ann Marie Casinelli, a senior manager with ParenteBeard, has over 20 years of accounting experience, including 12 years in public accounting. In her role as senior manager, she collaborates with attorneys, investment advisors, family offices and integral parties to achieve clients’ objectives. She works closely with clients to address their tax, financial reporting and business advisory needs. ParenteBeard is headquartered in Philadelphia and has an office in Wilmington. Casinelli works in the Cherry Hill, one of 19 operated by the firm.
