Thanks to Wave Pro Tony Tropeano for writing this survival guide for entrepreneurs and for helping US Wave users to succeed!
Follow these 5 tips to preserve the financial health of your company:
- Keep detailed records - Start out your entrepreneurial journey right with good, detailed record keeping. Many entrepreneurs only think about ways to make money and neglect keeping good financial records leaving them in a scramble at the end of the year before the tax deadline. There are many free resources available to help you keep detailed records of your income and expenses, including the following:
a. Wave Accounting – A free cloud-based bookkeeping software solution. All transactions are synced from your bank account and imported into the software daily. This is very efficient and much quicker than the monotonous task of manually entering every transaction from paper bank statements. It also relieves the tax time stress of scrambling around in January or February trying to determine your income and expenses for the business.
b. Podio – A free cloud based project management software with thousands of apps. This software will allow you to choose from several apps from business development, project collaboration/management, CRM and as an intranet. It also has a function that allows you to build your own apps.
c. Receipts by Wave – This app is free to download on your Androi or iPhone device and allows you to snap pictures of your receipts to have them inegrated with your accounting system. You can scan and email them if you don't have a mobile device to keep track of all your expenses in the cloud.
- Comingling funds - If you have only one bank account for business and personal transactions, make sure to use the 'Move to Personal' function in Wave. This will result in accurate financial records and will not cause confusion as to which transactions pertain to the business and which transactions are personal.
- Tax Strategy - Many wonder as they are in the process of setting up a new business, “what is the difference between an S Corp and an LLC?” You will pay significantly more in tax as an LLC due to self-employment tax. An LLC is a less formal structure, but in the grand scheme of things, you can expect significant tax savings as an S Corp. In other words, you can pay yourself more with an S Corp tax structure.
S Corp vs LLC Illustration
For example, in 2012, your income was $200,000 and expenses were $100,000. This will result in a net income of $100,000. Under the LLC tax structure, you will pay tax on your taxable income (all business and personal income) and self-employment tax of 15.3% on your net income. The formula is Net income x .9235 x 15.3%. Your self employment tax will be $14,130. The only difference between an S Corp and an LLC is that you will not pay self-employment tax under the S Corp tax structure. Although there is no self-employment tax under the S Corp, you are still required to pay a reasonable salary (payroll taxes will be paid under a salary) if you are profitable. As a general rule, it is a good idea to pay a reasonable salary of 40% of your net income. In the scenario of the company with $100,000 in net income. The company would pay the owner a salary of $40,000. This will result in payroll taxes of $6,120. Typically you would pay approximately another $200 for state unemployment tax and $56 for federal unemployment tax. As a result the total tax paid by the S Corp would be $6,376.
The end result is a tax savings of $7,754.00
- What if I have an LLC? Do I have to dissolve my LLC and form a new S Corp? You do not have to dissolve the LLC. There are ways to file a late election for an S Corporation even if you file a few years after organizing the LLC. Please consult your CPA for more information on how to start the process.
- List of typical Entrepreneur marketing expenses - Although this is not an exhaustive list, below I have provided a list of typical expenses for the average business:
- Contract Labor
- Vehicle (actual expenses or mileage if business use is 50% or more of total mileage)
- Merchant account fees
- Bank charges
- Education – professional development and training
- Advertising and marketing
- Professional fees - legal, accounting and tax
- Telephone, internet, fax
- Meals and entertainment while conducting business
- Computer and equipment costs
In conclusion, surround yourself with a good solid network of professional advisors, including a CPA, attorney and financial advisor. A CPA will provide several services related to tax and accounting, including tax prep, tax planning, bookkeeping, budgeting, entity restructuring and offering general business advice. An attorney will prepare and review all of your contracts and some attorneys specialize in setting up trusts for asset protection. A financial advisor will help you invest your money through short-term, mid-term investments as well as set you up with a retirement plan. Retirement plans are a good way to not only save for the future, but can provide you with significant tax savings for your business. These professional advisors often work together to accomplish the same goal in mind in protecting you and your business, discovering ways to reduce your tax liability and in preserving and growing your wealth.