Starting a Company
Starting a new business can an incredibly rewarding professional endeavor. However, there are several considerations to ensure you and your business are positioned for success.
Potential Direct Financial Impact
- The costs associated with setting up a separate business entity (LLC, C-Corp, S-Corp) to limit your personal liability.
- Capital needed to cover Initial startup expenses and ongoing operating costs to run the business.
- Premiums for necessary business insurance policies (General & Professional Liability (Errors & Omissions), Business Owner’s Policy, etc.).
- Health insurance premiums if you previously had job-related insurance coverage.
- Potential tax benefits from utilizing retirement accounts for the self-employed or small business owners.
- Potential tax savings on your equity ownership in the form of tax-free capital gains.
- Any costs associated with setting up a payroll company and/or benefits if you have employees
- Potential tax savings from lower corporate income tax rate and business deductions.
- Increase in Social Security Taxes paid as both the employer and the employee.
- Taxes on any income and distributions from business.
- Quarterly estimated tax payments.
Potential Secondary Impacts
- The corporate structure you choose will impact your business registration requirements, your taxes, and your personal liability. Register your business as an entity with the Federal & State government and obtain a business tax-ID number.
- The need to maintain proper bookkeeping records. Separate business accounts from personal accounts. Create a system to track deductible business expenses.
- The potential need to raise funds or borrow capital to cover projected startup and operating expenses until your business becomes profitable.
- The advantages of possible lower income for a given year(s).
- Potential need to recalibrate on your risk tolerance, objectives, and target allocation for your investable assets.
- Potential lifestyle implications as a result of no longer being able to rely on a steady paycheck, benefits (ie. health insurance), and paid time off.
Self Completion/Execution Risks
- Missing significant tax savings from your new employment status
- Equity in the new business not being categorized in the most favorable way
- Large adverse tax consequences of having to change the corporate structure of the business down the road.
- Not securing adequate business insurance coverage to protect you from personal and professional liability.
- Not paying, or setting aside funds to cover, quarterly estimated taxes could lead to an unexpected tax burden.
- Commingling personal and business funds could lead to issues down the road.
- Missing potential tax deductions and/or not utilizing tax advantaged accounts for self-employed and small business owners.
- Not securing insurance to protect your business, and your family, in the event you experience an unexpected illness, injury, or early death.
- Not using business contracts to protect yourself.
- May be subject to unincorporated taxes if you do not set up an LLC or incorporate (S-Corp or C-Corp)
Situations Where Expertise Adds the Most Value
- Tax Adviser
Working with a tax adviser is prudent to evaluate the tradeoffs of the different corporate structures to determine the optimal entity type for your new business based on the tax and legal implications. It may also be worthwhile to discuss the pros and cons of the various self-employed and small business retirement plan options to determine the best fit based on your company size and income.
- Legal Adviser
Consulting an attorney is advisable to ensure that you are taking necessary precautions to mitigate your personal liability and overall business risk. Additionally, it may be worthwhile to consult a Trust & Estate attorney if you: have a large estate ($20M+), live in a state with estate taxes below the federal level or you expect that the value of your new company may rise significantly in the future and you would like to gift equity to a family member while the current value is lower.
- Financial Adviser
Working with a financial adviser may be advantageous to incorporate any significant income changes into your budget and financial plan. Additionally, a financial adviser can also help you decide if starting a company impacts your investment risk profile, and whether you should reallocate any investments.
- Tax Adviser