Starting Your First Small Business? What Should You Know?

If you've recently made the decision to leave the 9-to-5 grind and start your own business, you may be wondering where to begin. Even if you have a foolproof idea and some startup capital, there are a number of logistical and financial arrangements you'll need to have in place before you open. Read on to learn more about selecting a corporate structure and getting the necessary paperwork in place to begin conducting business, as well as some services you may need to keep your business chugging along successfully for years.

How should you determine your business's corporate structure?

Because businesses and individuals are subject to very different tax rates and rules, incorporating your business and selecting a specific corporate structure is important in helping reduce your tax liabilities and providing protections for your personal assets.

Without incorporation, your personal assets may be subject to seizure (and your wages subject to garnishment) if you are sued by a disgruntled former employee or injured customer. However, there are a variety of different corporate structures available for most small businesses, and you may be wondering how you can decide which is right for your business.

Sole proprietorship

If your business is small, or involves only the provision of services by a single individual (like an independent accountant or attorney), you may be able to get by with a sole proprietorship. This type of arrangement offers more simplicity by allowing you to keep all assets and debts in your own name.

Instead of filling out a separate tax form for business income and expenses, you'll simply include these on your own Schedule C, and will be assessed taxes at your ordinary marginal rate. In some cases, a sole proprietorship may save you money in taxes by allowing you to use business expenses to offset business income and personal income.

S corp

An S corp is another type of corporate structure that can help you avoid certain taxes, specifically the "double taxation" that occurs when business revenue is taxed after being received by the corporation and then taxed again after it has been passed down to shareholders or partners. By establishing an S corp, you'll be better able to reinvest your profits into your business, helping to expand and hire new staff.

However, an S corp isn't always a suitable structure for every business, and may not provide you the necessary protections from employer or customer lawsuits. If you work in a litigation-prone industry, you may be better served with a corporate structure that provides more personal asset protection, like a limited liability corporation.

Limited liability corporation (LLC)

An LLC or limited liability partnership (LLP) is one of the most commonly used corporate structures. These corporations help protect business owners by separating personal assets from business assets and rendering these personal assets immune from seizure or garnishment if you're successfully sued by a former employee, customer, or competitor. This can help give you the freedom to take more risks with your business than you otherwise might, and will also allow you to easily pass along your business to an heir or purchaser when you'd like to retire.

What else should you have in place before opening your business?

Once you've determined the best corporate structure for your business and have filed the necessary papers to incorporate, you'll likely need to consult an accounting services for small businesses to set up payroll, accounts payable and receivable, and tax reporting software.

If you're accustomed to filling out your personal income taxes during a spare evening in early April, the tax reporting burdens placed on small business owners may come as a shock. By being proactive, you'll be able to ensure that any reporting deadlines don't catch you unawares, and you'll have the equipment in place to easily run asset and debt reports for a specified period of time.