STEP 1: Choose a Business Structure

• Take some time before you begin business operations to decide which structure is best for your business.

• You can always change your structure down the road, especially as your business grows, but it’s important to understand the pros and cons of each option as soon as you can.

• I’m going to share with you the most common structures for creative entrepreneurs.

• Sole Proprietor

• This is the easiest business structure to form because it’s just you, and it begins when you make your first sale. On the federal level, you don’t need to do anything to create a sole proprietorship, but your state or city may require permits or licenses to operate.

• Many people don’t think that they are considered a business unless they form a Limited Liability Company (LLC), but that’s not true. According to the government, a sole proprietorship is just as much a business as anything else.

• The tax reporting is pretty straightforward with this structure. You report your annual income and expenses on a Schedule C that’s filed with your personal tax return. If your state has an income tax, then the info you reported on your federal return will just flow right onto your state return.

• The big downside to the sole proprietorship structure is that the owner is personally liable for any financial obligations the business may have.

• This means if the business gets sued, the plaintiff can come after your personal assets like your home, car, personal bank accounts and any future income you make in order to satisfy the court’s ruling.

• Single-Member Limited Liability Company (SMLLC)

• The single-member LLC is a great option for a single owner who wants more liability protection than a sole proprietorship but isn’t ready to take the leap to become an S-Corporation.

• If you properly keep your business and personal purchases separate, the LLC will limit your liability in the event that something happens and you are sued. It doesn’t make you invincible though. If the court decides that you haven’t kept things separate enough, it could break down that protection, and your personal assets could still be taken.

• To create a SMLLC, you will register with your state.

• Each state has its own form, but it’s usually called “Articles of Organization” or something similar. In some states, the annual fees can be minimal (less than $200), but in others, like California, fees can be closer to the $1,000 range.

• You would report your annual income and expenses exactly like a sole proprietor, by using the Schedule C form.

• Partnership Limited Liability Company (LLC)

• The LLC for a partnership is created the same way as a SMLLC—by registering with your state. It has all the same limited liability protection as the SMLLC, but it’s for two or more owners.

• You would report your annual income and expenses on a Form 1065 partnership return, which is completely separate from your personal tax return. No tax is paid with the return; the income and expenses flow through to your personal tax return through a K-1 form, where the money is taxed.

• When it’s time to complete your personal tax return, you or your accountant will enter the information from the K-1 form into the tax program. Now, when you look at the front page of your federal tax return, you’ll see your share of the income or loss generated by the partnership.

• If you decide a partnership is the best option for your business, it’s a good idea to set up a partnership agreement to decide on ownership percentages and how much each of you will be paid when it’s time to distribute the income.

• Contact a lawyer to create the agreement so if any tricky situations come up, you have a rock-solid agreement to reference.

• S-Corporation

• To create an S-corporation, your business must first be a corporation or LLC. Once that has been set up, you will file an “election” form with the IRS that will request S-corporation status for tax purposes. You’re still receiving the liability protection that the LLC provides, but now you qualify for tax savings.

• You will report your annual income and expenses on Form 1120S (the S Corporation return) instead of on your personal return. Usually, no tax is paid with the return.

• With this formation, you avoid being taxed twice like a regular corporation by passing income and expenses straight through to you and other owners’ personal tax returns, where it will be taxed.

• The tax return will generate a K-1, just like the partnership return. By entering the information from the K-1 form into your personal tax return, you’re reporting your share of the business income and expenses.

• This structure requires owners to be paid a “reasonable compensation” which is subject to employment taxes. If you choose to go with this formation, a good payroll service is worth the investment.

• An S Corporation can offer tax savings for businesses making a net income (total income less expenses) over at least $50,000, and possibly higher depending on what reasonable compensation is for your position.

• Use salary.com as a guide to help you determine your reasonable compensation. Only distributions made to the owner above and beyond the reasonable compensation receive a tax savings (no 15.3% employment taxes on these payments).

• So, if you’re just starting out, this may be a good option to look into when your net income is at the $50,000 mark or higher.

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• In the table below, I’ve illustrated the tax savings an S-Corporation can offer.

•  Schedule C BusinessS-Corporation

• Total biz profit $75,000 $75,000

• Owner Taxable Wages $75,000 $40,000 (salary)

• FICA Tax (12.4% on first $147,000 of wages) $9,300 $4,960

• State Unemployment Tax $0 $150

• Corporate Tax Prep $0 $500

• Payroll Service $0 $350

• Total Payroll Taxes and Additional Tax Prep Fees $9,300 $5,960

• Note that items like the state unemployment tax, tax prep fee, and payroll service costs will vary based on your state and who you hire for your tax prep and payroll services.

• In this example, Katie has a small business branding business. Her profit (income left after expenses) for the year was $75,000.

• If Katie has her business set up as a sole proprietorship or single-member LLC, she would file a Schedule C. In this case, all of the profit of the business would be considered taxable for FICA/Self-Employment tax.

• If Katie has her business set up as an S Corporation, she will only incur FICA/Self-Employment tax on the wages paid to herself through a salary. In the end, Katie can save about $3,300 in tax by choosing to become an S Corporation.​

STEP 2: Establishing Your Business/Filing for an LLC - file documents through the State to get started. NOTE: The filing fees for the State of TX are $300 to establish your LLC.  

• You'll need a registered agent, address, legal entity name (check here for availability)​

STEP 3: Establish an EIN from the IRS. The EIN number essentially gives the IRS a way to link your business income to you as a person. Using an EIN allows you to fill out tax forms like 1099s and W-9s without handing over your social security number to everyone who requests it. You will be asked what type of business, the reason you're requesting an EIN and other basic information. Select the option to receive your EIN instantly and print out this information and save in a safe place. This information is hard to retrieve later. 

STEP 4: Establish your business bank account. Bank accounts are free or low-cost, and I can’t tell you how many headaches this will save you if you do this step before any transactions begin. It keeps everything in one neat little place instead of having to print off personal and business checking account statements and credit card statements to find business expenses. If you’re a sole proprietor operating under your personal name, you can simply open up another personal checking account and savings account under your name and social security number. If you set up your business under any other structure, you’ll need to set up your bank account under that business name and Federal ID number (EIN). When you do this, be very careful not to make personal purchases out of your business account. Typically, banks require the following to set up a business account: 1) Two forms of personal identification (ex: driver’s license, passport, credit card, etc) 2) Employer ID Number (unless you’re a sole proprietor) 3) Business documentation (ex: Articles of Organization or Assumed Name Certificate). To avoid multiple trips to the bank for setup, call your bank to verify you’ve got all the correct documents. 

STEP 5: Software to Track Income & Expenses: Find a software that works for you and an accountant to track your expenses. We highly recommend QuickBooks Online. Online pricing here: QuickBooks Pricing. ​​

Common Business Deductions

The thing to remember is that if you are spending money on your business for things such as education or in your business for items such as supplies, the expenses are most likely deductible (yay!). Tax deductions reduce your taxable income. Many expenses involved in building and running your business are tax-deductible, which means you can subtract those costs from your taxable income. 

• Advertising

  • Don’t forget: digital marketing, social media marketing, influencer marketing, building and maintaining a website, email marketing, business cards, sponsoring an event, food and entertainment costs at promotional events, listings and promoted listings on retail sites or review sites, swag

• Charitable Contributions (only for S Corps and C Corps)

• Commissions and Fees 

  • Don’t forget: payment processing fees (PayPal), merchant processing fees (Etsy), bank fees, affiliate payments to third-party marketers, commissions for salespeople

• Contract Labor

  • Don’t forget: virtual assistants, second shooters, seasonal hires, freelancers, consultants, business coaches 

• Cost of Goods Sold

  • Don’t forget: packaging, storage costs, raw materials

• Depreciation and Amortization (for large equipment or assets)

  • Don’t forget: computers, printers, larger furniture, cameras, lenses, production equipment, vehicles, customer lists, copyrights, internet domain names, licensing agreements, patents, service contracts, trademarks, trade secrets

• Education and Conference Expenses

  • Talk to an accountant about whether or not tuition will qualify for you.

  • Don’t forget: e-books, online courses (like this one!), in-person conferences, coaches

• Employee Benefit Programs

  • Make sure you talk to an accountant about these.

• Home Office

• Insurance (not health)

  • Don’t forget: business liability insurance, event insurance, vehicle insurance for business vehicles

• Interest

• Legal and Professional Services

  • Don’t forget: attorney, bookkeeper, accountant, tax professional

• Office Expenses

  • Don’t forget: paper and stationery supplies, less-expensive office furniture, small computer equipment, shipping, cleaning services, cleaning supplies

• Rent or Lease

  • Don’t forget: event space rental, special equipment rental, storage rental

• Repairs and Maintenance

• Startup Expenses

• Supplies

• Taxes and Licensing

  • Don’t forget: business license, professional license, trademark, business formation or renewal, employer portion of payroll taxes

• Travel Expenses

  • Don’t forget: taxi fare, airline tickets, hotel costs, luggage fees 

• Utilities

• Vehicle Expenses

  • You need to keep track of your miles no matter if you’re going to track your individual expenses like gas and maintenance or if you’re going to use the IRS’ standard mileage deduction.

  • Don’t forget: tolls, parking fees

• Wages (not your own)

If you'd like us to help you with setting up the LLC and a dedicated accountant to help you with your Bookkeeping, please reach out.