By: Michael Brody, CPA
Having a great idea is not the only thing you will need when starting a business. Here are three important items all future business owners need to consider before they open their doors.
Choice of Entity:
There are several different types of entities to choose from, ranging from the sole proprietorship (one owner) to the C Corporation, which is the entity most well-known corporations operate as (GM, AT&T and the like). Most likely, if you are starting a new business, you will choose between the Sole Proprietorship, or form a Partnership if two or more individuals are involved, or possibly a Limited Liability Partnership (LLP), a Limited Liability Company (LLC), or an S-Corporation. The most popular choices for privately held businesses would be the flow through entities, particularly the LLC, LLP and the S-Corp.
The choice of entity you choose will dictate your personal liability, the amount of tax you pay, and even the number of shareholders and types of shareholders you are allowed to have, so don’t take this step lightly.
Each entity type has its pros and cons and this is where the advice of a good professional such as an attorney and CPA comes in. It may cost you a little money up front, but trust me that it will save you time, money and headaches in the future. A CPA can show you the tax advantages and disadvantages of any or all of the choices while an attorney can help you execute the proper legal documents in setting up your entity, whether it is a basic operating agreement or a corporate charter along with Board of Director’s minutes.
Having a Business Plan
Next on your “new business checklist” should be having a well thought out business plan. A business plan will help lay out how a business will operate, how it intends to fund and finance its start-up and what the expectations are for the operations of the business, both financially and operationally. This can be as basic as a summary narrative composed by a sole proprietor outlining the objectives of the business, along with an excel spreadsheet that projects its anticipated cash flow activities during the start-up and early periods of operation.
For a more sophisticated entity, where there are several partners, members, or shareholders, this might include an elaborate business plan which would include a description of the business purpose, its operating structure, its management team, and a statement of its vision and core values. Included in this plan you would probably find cash flow projections detailing everything from the seed capital investments to any financing arrangements, continuing with projected cash flows from operation. This would also contain the projected cash expenditures including start-up costs, debt service expenditures and normal operating expenditures for the cost of operation and all other administrative expenses.
These types of projections will also include the anticipated re-payment to investors showing estimated amounts and anticipated time of return on investments.
Most people who are starting a new business rely on their CPA for advice regarding cash flows, raising capital and their professional opinion on the business plan. A CPA has the experience and knowledge to help business owners create a plan for future success.
Setting Up an Accounting System
As vitally important as any other aspect of setting up a new business is the choice and implementation of an accounting system. It was once said that “Accounting is the Language of Business”. CPAs would say truer words were never spoken. Implementation of a logical, well organized and user-friendly system of recording the transactions that occur on a daily basis in a business is not only necessary to the efficient running of your operations, but it is also needed in order to comply with the tax laws and basic accounting procedures that have become more and more a part of the reporting process for any company.
Many different types of accounting systems are available for use. Systems such as QuickBooks, Peachtree, and Sage in their various editions and Microsoft office programs such as Excel and Word are extremely useful and will facilitate the accounting needs of most new businesses.
Also important is setting up a good system for your payroll functions, including time keeping, human resource requirements, payroll processing and payment, as well as the necessary reporting requirements to the federal and local government agencies. These can easily be done through the QuickBooks system, or if preferable through the use of an outside payroll service. For most business owners, using a payroll service is ideal as they will make sure you are withholding the necessary taxes and filing with the State and Federal governments in a timely manner to comply with all laws and regulations.
When one is looking to make the proper accounting choices for the business entity, it is essential that they consult with a CPA firm. Many firms have individuals who have an expertise in advising you on which programs you should use, and will help in setting up an accounting system geared towards your business. The most important point here for a new business: get the proper system up and running from the start. The reports that you generate from these programs will be vital in monitoring the financial position and results of operations of your business, as well as tracking the cash flow of your business (after all, cash is the lifeblood of a business). These systems can also provide budgets and comparative reports which are very important to identify areas where a company can be more efficient and where goals are not being met.
Just as important, these reports are the starting point for the entities tax reporting requirements leading to the preparation of its annual tax returns.
The choice of entity, a sound business plan, and a reliable accounting system are instrumental to the ultimate success of any business. I can tell you from my thirty-five plus years of experience, the companies that put the time and money into starting their business off right, save even more time and money in the long-run, and those businesses are more successful because their management has better financial visibility.
Michael Brody is a CPA with Bronswick Reicin Pollack. He began practicing in public accounting in 1976 and has developed expertise in taxation, accounting, auditing and financial planning. His clientele has encompassed the full scope of business entities, with particular expertise in professional service entities, real estate entities, construction contractors, as well as manufacturing, and retail entities. Michael also takes pride in tax planning services he provides to many individual taxpayers.