Starting a Business
(Revised November 2015)



Table of Contents

BEFORE ACTING ON ANY OF THESE TOPICS,
CONSULT WITH YOUR PROFESSIONAL ADVISOR.


Choosing an entity for your new business

Corporation

The advantages of opting for a Corporation as your business entity are as follows:

  • A Corporation offers limited liability (maybe not - see below).
  • The formation of a Corporation is relatively inexpensive - generally about $100 to $500.

There are, however, a number of disadvantages as well:

  • The operating costs are high, which means there will be more tax filings and payroll tax returns involved. Your accountant will love the additional fees.
  • Your income tax bill will probably be higher.
  • If anyone is injured you could still be sued personally, and if you are found to be personally responsible you will be held liable.
  • Paying close attention to corporate formalities (i.e. keeping corporate minutes) is advisable.  There is a legal concept called 'piercing the corporate veil,' which could cause you to be held personally liable for the financial debts and other decisions of your corporation.

Unless there are issues concerning liability, as a general rule we do not feel that starting a business as a corporation is advisable. Since every situation is different, however, you really need to get some professional advice. If you have concerns about personal liability our suggestion would be to begin by speaking to your attorney and your insurance agent about covering yourself with a good insurance policy.

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Limited Liability Company (LLC)

LLCs have a number of advantages including:

  • LLCs have all of the advantages of a sole proprietorship, because for tax purposes, the LLC is treated as a sole proprietorship in most cases
  • LLCs offer the same protection against creditors and lawsuits as do corporations; however, you could still get sued and in many circumstances, you would still be personally liable.

Conversely, LLCs have the major disadvantage of being expensive - the fees for setting up an LLC in Illinois begin somewhere between $1,000 and $2,500, but can be even higher in the right circumstances. 

As with Corporations, we generally do not recommend an LLC for a new business. Usually, the business does not last long enough to recoup the high initial cost.

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Sole Proprietorship

There are a number of advantages to being a sole proprietorship:

    • There are virtually no setup costs - you already are a sole proprietorship.
    • Your income tax bill will probably be less.
    • There are fewer payroll and income tax returns involved.
    • You will probably pay your accountant less.

There are also a number of disadvantages to a sole proprietorship:

    • You are liable for all debts of the business.
    • You could be sued.

Even though these disadvantages exist, unless there is an issue with personal liability we recommend a sole proprietorship in most cases.

Before deciding about going with a sole proprietorship you need to consult with your attorney and your insurance agent.

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Home Owners Insurance will not cover you

Even if you plan on operating your business out of your home, most homeowner's insurance policies will not cover your business activities. Also, if you plan on using your automobile for the business, your basic auto insurance policy probably will not cover your business driving. In both situations, you need to contact your insurance agent.

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Paying and deducting salary
 

Generally, salary that you pay to your employees is fully tax deductible as long as the salary is reasonable. This applies to salary paid to close relatives such as you child or spouse. Assuming that your children and spouse will also be working in the business, there are a number of advantages to paying them a salary. If you are one of our clients, we can discuss this topic with you personally; all situations are different - there are no cookie cutter answers on this one.

There are a number of record keeping and reporting requirements for salary payments (discussed in the next section) - even for payments made to your own children. 

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Requirements when hiring employees 

Form I-9 - Employment Eligibility Verification
 

Form I-9 documents the fact that the employee is either a US citizen or legal alien with a work permit. If you are hiring a non-relative, you should fill out the form and keep it in the employee’s personnel file along with copies of any related required documentation (e.g. social security card, voters registration card, green card, etc.). With all the publicity concerning non-documented workers, we expect greater enforcement in the future.

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 New Hire Report

The government used the New Hire Report form to track down dead-beat dads, and you are required to file it within twenty days of hiring a new employee. There do not appear to be any exceptions, even if the new employee is your five-year-old child, and the penalty for not filing this report ranges from $15 to $500.

We recommend that you file this form; even if you only hire family members, filing the New Hire Report is proof that are treating them as bona fide employees.

Illinois New Hire Report
Indiana New Hire Report

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Forms W-4

State and Federal W-4s  are the forms that employees use to declare the number of exemptions they are claiming for withholding tax purposes. 

Federal Form W-4
Illinois Form W-4
Indiana Form W-4

We recommend that you have all employees (including family employees) fill out these forms before their first payroll and at the beginning of each year.

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Reporting requirements for salary payments

There are specific quarterly and annual reporting requirements if you hire employees.

Starting Requirements

  • You will need to get an Employer Identification number from the IRS. You can use their toll free number ((816) 823-7777) to obtain this number. Alternatively, you can go to their website page at http://www.ein-gov.us/
  • You will need to register with your state revenue department.  

If the only employees that you will be paying are  your children who are under eighteen-years-old, you may not be liable for unemployment taxes. However,  we still suggest that you register with the state as soon as possible; especially if any of your employees are not your own children. 

 

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Quarterly requirements

If you pay wages, you have to file Form 941 - Quarterly Federal Payroll Tax Return, even if you do not owe any payroll or withholding taxes. For example, if all of your wages are exempt from payroll taxes (e.g. salary to your child under eighteen-years-old), you should still file quarterly payroll tax returns even though you do not owe any taxes. The IRS should automatically send you these forms.

If you registered with Illinois or Indiana, your respective state will send you blank quarterly Illinois and Indiana Unemployment Tax Returns returns for filing. We suggest that you file these returns on time, even if you owe no tax.

Illinois and Indiana both require you to file withholding tax reports.

For Illinois, you will have to file IL 941. Press here for this form. The state revenue department may notify you that your filing requirement of this form is annual instead of quarterly.

For Indiana, the quarterly payroll reports have to be filed through their website.  The Indiana Department of Revenue will notify you of your filing requirements after you register (which was discussed previously).

All quarterly tax returns are due by the end of the month following the end of the quarter. The specific dates are as follows:

Quarter Ending
Return Due Date
March 31
April 30
June 30
July 31
September 30
October 31
December 31
January 31of next year

Note - if the due date falls on a Saturday or Sunday, the due date is the following Monday.

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You will have to give W-2s to all of your employees by January 31st of the following year, and you have to file the W-2s (along with a W-3) by February 28th of the following year. You have to file these forms even if the only employees are your own children.
  • Indiana requires an annual filing of Form W-3 along with W-2s by February 28 or the following year.  This report can be filed online by going to http://www.in.gov/dor/4456.htm.
    Illinois does not have any W-2 reporting requirements.
     
  • You may have to file Form 940, Federal Annual Unemployment Contribution Report, by January 31st of the following year. You do not have to file this form if all wages are to your spouse or your children who are under eighteen-years-old. The IRS should automatically send you this form.
     
  • You will have to file Federal Form W-3, Federal Annual Wage and Withholding Report, along with W-2s by February 28th of the following year. 

Note - if the due date falls on a Saturday or Sunday, the due date is the following Monday.

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How do I keep records?
 

The following is my list of 'dos':

  • Open up a separate checking account for your business.
  • Deposit all receipts (both checks and cash) from the business into this account. 
  • Write checks for all direct business expenses from this account. If you happen to pay a business expense from your personal account, take a check from the business account (to your personal account) to cover the expense.
  • When paying a credit card bill, write a business check for the business portion of the bill and write a personal check for the personal portion of the bill.
  • To pay your personal expenses, transfer funds (by writing a business check) from your business to your personal account.
  • Reconcile your checking account every month - if you do not and the bank makes an error in their favor, the bank may not be responsible if you do not timely notify them.
  • Record all checks written.

The following is our list of 'do nots':

  • Do not use cash to pay expenses; it is hard to keep tract of cash expenditures.
  • Do not use your business checking account to pay for personal expenses.
  • Do not forget to record all checks written.; you could get a nasty letter from the bank.

Note - some banks charge much higher fees for 'business accounts.'  I suggest that you either switch to another bank, S & L, or credit union.  Alternatively, open up a second personal  account for your business (assuming your 'business' is a sole proprietorship).

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How long do I keep my records? 

Seven-year minimum for bank statements, canceled checks, deposit receipts, payment receipts, attendance reports, and bills. The general statute of limitations for most tax items is three years from the later of:  

  • The due date (including later due dates due to extensions).
  • The actual date that the return is filed.

The normal 3 year statute of limitations is extended to 6 years if there is an omission of more than 25% of gross income. Also, if a return contains a fraudulent item (and the IRS proves it), there is no statue of limitations.

Due to a possible six year audit window, the seven year record retention is recommended.

Four-year minimum for payroll records. Generally, there is a four year statue of limitations that is similar to the general rule for statute of limitations affecting income tax returns.

Forever - copies of income tax returns, IRS audit reports and related correspondence, home purchase and improvement information

Finally, if you are in doubt then keep the records.

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Documenting automobile expenses

 

In every IRS examination we have had for the last five years,
the examiner wanted to see written documentation concerning business miles and total miles.  I have been told of several instances where IRS agents required beginning and ending odommeter readings for each business trip!

  • You should keep a log in your vehicle and record the purpose and mileage of each trip.  If your driving habits remain fairly constant throughout the year, you can keep a log for a few months and base the entire year’s auto use on the results for the logged months. The easiest way to deduct auto expenses is by using the per diem method. Under this method, you are automatically allowed a specific deduction ( 57.5 cents per mile for 2015) for each business mile driven in your automobile.
  • You need to record the odometer readings at the beginning and end of each year.  Also recording beginning and odometer readings for each business trip is even better.
  • Keep all repair bills. Repair bills normally record odometer readings when the car is serviced. If your tax return is examined by the IRS, the repair bills are outside evidence of the actual miles you put on the automobile.

What auto miles are deductible 'business miles' and which miles are not? Generally, if you are driving from home to a customer or some type of temporary business location, the mileage is considered personal and not deductible. This type of mileage is considered to be commuting.

The mileage from the first business stop to the second (and third) is considered to be business miles. If you have a 'home office' in your home that qualifies as a business location, your mileage from your home to the first stop may also qualify as deductible automobile mileage.

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