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Tax Planning For The New Business Owner

Consider carefully your choice of business entity, and refer to that discussion to be sure you’ve made an informed choice.

The taxes you pay

As someone who owns a business or as an employer-you essentially act as your own employer even if you’re a sole proprietor you are required to collect various state and federal taxes and submit them to the appropriate agencies. It’s best to work with a CPA or other tax professional in knowing what taxes to pay and when. Some of these taxes include:

• Income tax withholding. These are “pay-as-you-go” tax that must be withheld from each employee’s wages based on the exemptions claimed on the withholding exemption certificate (Form W-4), marital status, and length of the payroll period:

• Social Security (FICA) tax. The Federal Insurance Contributions Act, or FICA, provides for Social Security and Medicare, the federal system of old age. Also, employers who pay compensation of $600 or more to independent contractors must report the payments to the IRS by filing Form 1099MISC for Miscellaneous income.

• Personal Income-tax. Sole proprietors or partners don’t get salary like every employee, so there’s no withholding. Instead, they are required to pay estimated taxes quarterly on Form 1040.

• Corporate income tax. If you have a business or work setup which is labelled as a “C corporation” then corporate income tax might be applicable for you.

Reporting income on a fiscal-year cycle is more convenient for most businesses, because they can end their tax year in any month they choose. A corporation whose income is primarily derived from the personal services of its shareholders must use a calendar year-end for tax purposes. In addition, most corporations are required to use calendar year-end.

• Sales taxes. While most service businesses are completely exempt from sales taxes, you should check with your state revenue office to make sure you are paying these taxes correctly.

Money saving tax strategies

The best way to save on taxes is to consult a qualified tax expert familiar with business and personal taxation in the state where you’re head-quartered. Optimally, it makes sense to get tax advice on running a business from a CPA or other tax expert before you launch your business. There are very few universal laws of tax savings-find the ones unique to your business.

Keeping an eye on the end game

Individuals can’t work forever, so a plan for ending a business can be as important as a plan for starting one. Ending a business is another tax issue since estate taxes can be a wild card.

There are many tax strategies available to business owners depending on what they want to do with the business shut it down, sell it, or pass it to future generations.

Most experts will tell you to plan a business with an exit strategy in mind. If you want to build it to a size that will make it an attractive sale target, that’s something you have to work toward from day one. Not every small business has a plan to go public or a chance of a huge profit at sale, so talk to your tax adviser to figure out the best way to tum out the lights for good.

Keeping the family business in the business

Passing on the family business faces many hurdles, from tax issues and owner reluctance to family conflicts and greed that can rival a Shakespearean play. It’s not surprising that two of three businesses that are passed on to one generation never make it to the next generation.

The key to making a successful transition is early, comprehensive succession planning. That’s often easier said than done, since business owners tend to be caught up in the day-to-day activities of running the business and don’t take the critical time to plan for their succession. Perhaps the following questions will start you thinking about the process.

Should I pass on the business? Perhaps you’ve always assumed that you would keep the family business in the family. That may be the right choice. Then again, there often are valid reasons why a family business should be sold to someone outside the family. Perhaps the next generation is not up to the task, or no one may be very interested in running the business. Maybe the future of the business isn’t all that promising.

Can I afford to pass on the business? You may be looking to the sale of your business to fund your retirement. Keeping it in the family may not provide enough income to reach that goal.

Am I willing to pass on the business? Business owners-especially those who created or significantly built the business-often find it difficult to let go. Many maintain tight control up until death, leaving family successors ill-prepared. Key employees, customers, and suppliers may disappear at the first signs of difficulty. Involve your designated successor in the business. Give them experience, let them make mistakes. It will improve the company’s chances of succeeding down the road when you’re no longer involved.

Who should I pass the business on to? Again, you may have made the assumption that it would simply pass to your children. However, most business succession experts concur that passing on a business equally to two or more children can create major problems. Let’s say you have three children. Do you pass the business on in three equal shares? if so, who’s going to actually run the business? Sharing command seldom works. Someone has to be in authority and this is an issue that should be settled before you die.

The key here is to be fair, not equal. Perhaps one of the three children isn’t involved in the business, and doesn’t want to be, but feels he or she should share in the profits. That child might be compensated by life insurance or other family property.

Choose a successor who’s the best person for the job. This may not necessarily be your spouse, eldest child, or personal favourite. They might even be outside the immediate family, such as a son or daughter-in-law.

Am I worried about a family feud? One reason owners sometimes put off succession planning is their fear that it will start a family feud over how everyone is going to get their share and who will run the business. If this is a concern-and it may be a concern you don’t even realize-it’s better to face it sooner rather than later. You don’t want the family trying to resolve the issue after your death-perhaps in court.

Succession experts recommend discussing the issue openly with your family. Let them know whom you’ve picked to run the business and how you plan to treat everyone fairly. Listen to their concerns, and make appropriate adjustments in your plans.

What estate tax issues will I face? You’ll want to bring in professionals here, such as an estate planning attorney and accountant. You’ll probably need an expert to make an independent valuation of the business. And a financial planner can help coordinate the work of the other professionals and be a valuable ear for bouncing off some of the non-tax issues.


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