Track Your Business Mileage NOW!!!


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How are you tracking your business mileage? Yes, one more item you need to do. I know how you feel. Our lives are busy with taking care of family, household chores, and running a business. The last thing you want to do is add another item to your long to do list.

Take a couple of minutes while you sip on that second or third cup of coffee. Discover why and how you can make your life easier by tracking those business miles.

As an entrepreneur, we need to save every penny we can. So why not track your business mileage so you can expense the deduction on your taxes.

You can use the optional standard mileage rate - for 2019 that is 0.58 cents per mile for business use. If you choose to track your miles, then you can’t claim the actual cost of using the vehicle. Such as

  • Fuel

  • Repairs and maintenance

  • You can’t claim the mileage from home to office and back


By tracking your miles you will still be able to claim parking and highway tolls.

In this blog post we are going to discuss:

  1. What’s Required to Track Mileage

  2. Ways to track mileage


What’s Required to Track Mileage

The IRS will allow you to write off your business, medical, charitable or moving miles at different rates.

  • Business @ 0.58 cents per mile

  • Medical or Moving @0.20 cents per mile

  • Charitable @0.14 cents per mile

Check with your bookkeeper or CPA to see what types of mileage you can deduct.

In order to take the business mileage expense off on your taxes you need to keep accurate records. The IRS will want to see the following items per trip.

  1. Address or location to and from

  2. Business purpose

  3. Dates

  4. Mileage

You do not have to write down the mileage odometer reading for each trip. But you will need to know the odometer reading as of January 1st and December 31st of each year.


Ways To Track Mileage

There are several ways to track your mileage, such as:

  • Mileage log book

  • Excel spreadsheet

  • Mileage tracking apps

Log Books can be purchased about anywhere these days. Log Books have preprinted pages with dates, descriptions, purposes from locations, destinations, beginning miles, and ending miles. All log books aren’t the same. Some may have more or less information that you will need to manually fill in.

It isn’t necessary to keep track of your personal miles. But you will need to write down the odometer at the beginning of the year. Because: Beginning year odometer - tracked business miles = personal miles.

Spreadsheets are wonderful in the fact that you can make it your own. You can add any number of columns and labels to your liking as long as you meet all the IRA requirements. For me, this is too tedious to log into my computer each time and fill out the spreadsheet before I forgot the information.

Apps are my favorite. They have come a long way in helping you stay organized in personal and business life. They can track your miles for you. Then at the end of the day you can declare what is business and what miles are personal. Some of the more common Apps are:

  • Gofar

  • MileIQ

  • Triplog Mileage Tracker


I’ve used MileIQ for several years. It is simple and easy to use. Automatic mileage recording. I swipe left for personal and swipe right for business when I categorize the miles. You can add notes to each drive for further clarification. This makes it very easy for me as months and even years down the road, I will not remember the details.

As of this writing MileIQ has 3 different plans:

  • Basic - 40 free drives every month. Perfect for someone starting out in business or wanting to try the app out. You can always upgrade anytime.

  • Unlimited - unlimited driving all month.

  • Monthly cost is $5.99

  • Yearly cost billed annually is $4.99 which equals to $59.99

  • Teams - nice for businesses with employees. They also give volume discounts

This app has automatic mileage recording. You can have monthly reports and year-to-date reports sent to your email with a click of a button.

When I’m traveling in a different vehicle, I turn the app off because I only use one vehicle for business purposes. You can add additional vehicles to this app if you like.


In the end, it doesn’t make any difference what you use to track your miles. Make sure you are using a method that works best for you.


Please contact me at Lola@bearnumbers.com for a free consultation. Let’s get your business on track so you can leave the worries behind and focus on your business.

Are You Tracking Your Expenses?

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Are you tracking your expenses? Are you tracking ALL of them?

Expense tracking can be very boring, mundane, and consumes a great deal of your time. I bet you say, “Oh, I’ll take care of those expenses when I have more time.” Yeah, we’ve all been down that road and the next thing you know is that you have a mile high pile of expenses receipts.Tracking our expenses isn’t a task that we want to do. Most of us would prefer working on other aspects of our business ~ not paperwork.

We will discuss here the:

  • Benefits of tracking expenses

  • Ways to track expenses

  • How to track expenses


Benefits of Tracking Expenses

The benefits of tracking your monthly expenses for your business are enormous. Some of the big benefits are:

  1. Keeping up with your cost on inventory

  2. Invoicing a client correctly

  3. Staying within the budget you’ve created

  4. Tracking your spending for cash flow purposes

  5. Taking deductions on your tax return

  6. Knowing your spending habits so that you can improve your income

These are all important benefits. But, you sure don’t want to leave any expenses on the table that could have been taken on your tax return. This would help to reduce that taxable income.


Ways to Track Expenses

I’m so very thankful to be living in the digital world. It has opened up many ways to track expenses. Here are some of the ways you can track your expenses:

  • Manually entering and creating a spreadsheet on paper

  • Using an excel spreadsheet and manually entering the expenses

  • Computer desktop software such as Quicken or Quickbooks Desktop

  • Cloud based accounting software such as Wave, Zoho, Freshbooks, Quickbooks OnLine, or Xero



How to Track Expenses

How are you going to track your expenses? You will need to find a system that works best for you. If you don’t like the system, then you probably aren’t going to use it. You are then back where you started from ~ not knowing how your business is doing.

There are several affordable choices to make depending on the size and income of your business. How to track expenses will depend on what system you decide to work with.

In general:

  1. Paper or Excel - you will need to manually input the data into columns of expense type for categorizing the expense on a daily, weekly, or monthly basis. For example: rent, utilities, office supplies.

  2. Accounting software - most accounting software will let you connect your bank and credit card accounts to the software. The software can pull in the transactions on a daily basis, thereby stopping the manual input. The transactions will still need to be categorized and checked with the monthly statement of your bank or credit card. By checking the statements you will make sure everything for the month was pulled in. You will also be sure that there aren’t any duplicates.

  3. Outsource - hire a bookkeeper to do all the tedious accounting work on your business. This will free up a huge amount of your time to actually let you run your business.


Summary

I’m telling my age here, but I clearly remember tracking expenses by hand on paper journals. That was really tedious and took all day.

My personal favorite way to track my business expenses is by using Xero - accounting software that is cloud based. I can pull anything up at anytime wherever I am. I’m not tied down to a particular computer to find out any information. When I’m on the go, I can take a picture of an expense receipt on my iphone using the app or log into the account for any information needed.


Please contact me at lola@bearnumbers.com for a free consultation. I can help structure your business to give you back free time. Free time to spend with family, take a vacation, read a book, or market your business.  You have the freedom to decide!

How Do You Measure Success In Your Business?

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How do you measure success? There are so many answers to this question. So much to interpret for each type of business and their owners. Everything continues to change as a business grows and expands.

I thought we would explore some answers here in this blog post.

Money - Income - Profit

Of course we all know that money is an important factor when you talk about success in your business. If we can’t make money, the business will not survive.

We can make a lot of money, but that doesn’t mean our business is profitable. The expenses of running the business have to be accounted for. Checking in on your financial statements will tell you and help you make sure that your bottom line continues to go up.

Of course, if those profit margins are starting to wind down, you may want to take another look at your business plan to see what adjustments you need to start making.


Client Satisfaction

Another indicator of a successful ran business is client satisfaction.

  • What are your clients saying about you and your business?

  • Are you having clients come and go or are they long standing?

  • How long has it been since your client base has increased?

  • Are you achieving long term growth with your client base?


Some ways to engage with your clients on their satisfaction level is:

  1. Open communication - listen to what they need

  2. Client reviews of your business

  3. Conducting surveys with your clients


A strong increasing client base is a good measure of success.


Employee Happiness

We all know that happy employees can be a huge benefit for our businesses. Some of those benefits are:

  • Joyful work environment

  • Productive teams and staff

  • Happy employees help with client satisfaction

  • Going the extra mile when needed


It’s important to make sure that our employees are just as happy to work in our businesses as we are. Making sure that an employee is happy and satisfied can be accomplished by:

  1. Employee reviews

  2. Valuing your employees

  3. Making your employees feel appreciated

  4. Offering good benefits and compensation

  5. Making sure they are fulfilled in their job


A positive employee morale in the workplace can make working fun and enjoyable. Put yourself in their shoes. Success with employees are when they are happy to begin each new day and loving what they do.

Personal Gratification

Another way to measure success is personal gratification. Are you, the owner and entrepreneur loving what you do? Are you on a plan to make your dream a reality?

For me, the personal gratification can be very empowering. I love getting up every morning to work in and on my business.  I get a great deal of satisfaction in helping clients, family, and friends with their financial decisions and goals. I love to discuss:

  • Money Management

  • Retirement Plans

  • Taxes

  • Bookkeeping

The joy of being able to help people on a daily basis is astounding. Lol, I’ve always been a number nerd. I guess I fell in love in that first accounting class in high school.

Without the personal gratification of success, it would be hard to stay motivated and grow your business.

Summary

As you can see, there are all sorts of ways to measure success in your business. It doesn’t matter what industry you are in. It also doesn’t matter if you are an online entrepreneur or have a brick-and-mortar business. Success is measured differently by millions of people.

How do you measure success?

If you would like to discuss your business and make sure those numbers are heading in the right direction, then please contact me at lola@bearbumbers.com for a free consultation.


6 Ways To Improve Better Cash Flow


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Managing your cash flow is an enormous challenge for many entrepreneurs. It can be especially hard if you are just starting out. You are trying to learn your market so that you can set your pricing.

Believe me, we all go through it at some point in our business careers. Even the well established businesses go through a rough patch when trying to expand a business.

Systems and procedures are a tremendous help when it comes to cash flow. I know you’re asking, “How can this possibly help with my cash flow problem?”.  In this blog we will discover how important your systems and procedures are and how you can help make it better.


  1. Having an ACCOUNTING SOFTWARE to keep track of all your expenses and sales. Posting these transactions on a regular basis is crucial. How could you possibly know what you have coming into your bank account vs what needs to go out if these items aren’t posted? Posting weekly rather than months at a time would be better so that you can see exactly how the cash is flowing at any given point in time. Another reason to post more often is so that details are easier to recall.


  2. INVOICING your clients immediately after a sale will bring the cash in faster than waiting a week or two to send out the invoice. Also, if you are working on a project that might require a little time, don’t be afraid to ask for a down payment up front. While the balance can be paid upon completion. As you establish yourself you may choose to ask for all funds up front. This may depend on the nature of your business.


  3. ELECTRONIC PAYMENTS are much faster than a client mailing in a check. So many things could happen to the check. It could bounce or even get lost in the mail. This delay will cause you a delay in receiving payment when you are trying to pay your vendors. Automated Clearing House (ACH) is much faster. You can even pay your bills and vendors online. Therefore, maximizing the funds in your account as long as you can. Make sure that you check with your bank on the transfer times. Some items may take a day or two and you don’t want to be late paying your bills.


  4. PRICING is a very scary and difficult subject to many business owners. But it is an item that needs to be addressed. Are you pricing your services according to the value that you are delivering to your clients? Have some of those clients sneaked in an item or two along the way that may not have been addressed in your original engagement letter? There isn’t any time like the present to review you pricing strategy. Make sure that you are charging clients for all services you are actually delivering. It will be helpful if you set yourself up a pricing template to make it easier when pricing for future clients. And the next time a client wants you to do something extra, tell them you will get back to them with a price if it is in your scope of business services that you provide. It may also be a service you might consider contracting out, all the more for letting the client know the service is an added cost.


  5. As your business expands and cash accumulates in your checking account, you might want to consider a HIGH INTEREST SAVINGS ACCOUNT. Talk to your banker to see what they can do for you. Make sure the cash you do have isn’t just sitting in the account and not earning you anything. You could make easy transfers as cash is needed.


  6. Take another look at your MARKETING. Is it time to improve your marketing to drive more clients towards your direction? Marketing can play a key factor in your business. It might be good to survey your clients to find out what you can improve upon. Sometimes it takes a little investing in our businesses to reap greater rewards.


Speeding up your cash flow will not only make running your business a little easier and a little less stressful. A good thing to remember is that, you will always need to make adjustments and tweaks to your business. This is the only way that your business will grow. Without the proper cash flow, a business will become too in debt and will not survive.

You may have heard the saying that “Cash is King”, well cash flow management is also KING.

Please contact me at lola@bearnumbers.com for a free consultation.



Another Year: More Awesome Goals To Set

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I hope you had a successful 2018 and you met most if not all of your goals. It is hard to believe that it’s now time to set 2019 goals.

I’ll be honest, 2018 was a hard year for me and not all my goals were met. My parents are aging and they needed my help. I know many of you can relate to this and it is surprising how much time is needed to take care of them.  I’m just so thankful they are very close by so that I can attend to their daily needs. I also had foot surgery and moved right before Thanksgiving. Wow that was stressful!!! Anyway, it is okay that all your goals are not met so long as you don’t abandon them.  I’ve moved those unfinished goals over to this year and will press forward. I’m feeling good about that.

Last year I created a workbook for goal planning.  Check out last year’s blog “5 Simple Steps to Set Successful Goals, (plus FREE workbook)”.

Happy Planning!!!


Please contact me at lola@bearnumbers.com if you have any bookkeeping questions or would like a free consultation.

Stay Out Of Trouble With The IRS And Paying Yourself Correctly

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Did you know that how you pay yourself in your business depends on your business entity and tax structure? Being an entrepreneur can be a learning curve. So many things to remember and so important you pay yourself correctly.

In this blog we will look at paying yourself from these entity structures:

  • Sole Proprietorships

  • Partnerships

  • Limited Liability Company (LLC)

  • S-Corporation

  • C-Corporation

Sole Proprietorships

The Sole Proprietorship is the easiest and basic of all entities to form. This makes it one of the most popular entities for small businesses. As a Sole Proprietor you and your business are considered the same entity. You are the only owner and responsible for all of your business assets and liabilities.

As Sole Proprietorship you are compensated by taking an owner’s draw from the business. The owner’s draw can be taken at any time and for any amount of money. It would be advisable not to take all income so that expenses can be paid when due.

Taxes aren’t taken out of an owner’s draw as it would if you were an employee and earning a salary. You will need to pay self-employment taxes and estimated quarterly taxes on your income.

To file taxes you will use schedule C to form 1040 along with your federal tax return.

Partnership

Partnerships are formed when there are two are more people owning the business. As with the Sole Proprietorship, Partnerships aren’t taxed as an entity either. Profit and losses are passed down through to the partners. Partners are the same legal entity as their business.

To compensate yourself in a Partnership you will need to take an owner’s draw, sometimes called an owner’s distribution. These funds aren’t taxed. You will need to pay self-employment taxes along with quarterly estimated taxes.

To file taxes the business will file a federal 1065 and K-1’s to the respective partners. You as a partner will file the K-1 along with your federal 1040. The K-1 shows the partners share of:

  • Income

  • Credits

  • Deductions

Limited Liability Company (LLC)

LLC’s can choose how they would like to be taxed as an entity:

  1. Single member LLC’s are treated like Sole Proprietorships

  2. Multi member LLC’s are treated like Partnerships

  3. Either Single or Multi member LLC’s can choose to be treated as a corporation

Single and Multi member LLC’s are compensated with an owner’s draw.  Just like Sole Proprietors and Partnerships, they aren’t taxed on the compensation and will need to pay both self employment taxes and quarterly estimated taxes.

Single member will file a schedule C with their 1040 tax return. Multi member will receive a K-1 to file along with their 1040. The multi member business entity will file the 1065 tax return and produces the K-1 for the partners.

The LLC’s that choose to be treated as a corporation will take a salary.  Read further along as I discuss the Corporation in more detail.

S-Corporations

The owners of an S-Corporation are separate from the business. S-Corporations pay their own income tax by filing form 1120S. The S-Corporations aren’t double taxed like the C-Corporation that will be discussed in the next section.

To compensate yourself, an S-Corporation can receive both:

  • Salary

  • Distribution or Owner’s Draw

The salary will be taxed unlike the owner’s draw or distribution. There is also one other way and S-Corporation can be paid.They can be paid by dividends. If there is more than one owner or shareholder then the dividends can’t be taken as freely.

One item to note: The Internal Revenue Service expects you to take a reasonable salary according to your job description. Paying yourself too little or too much are both red flags and the IRS might just investigate the business.

Some ways to determine reasonable compensation are:

  1. Pay compared to other employees in the business

  2. Your time and effort invested in the business

  3. Compare salaries to other individuals in your industry

  4. Is your pay directly related to the hours you work

  5. What duties are your performing as part of your role in the business

  6. What is your level of responsibility in the business

C-Corporations

Lastly, the C-Corporations. This entity is probably one of the least favorite with small business. Several reasons are:

  • Costly administrative fees

  • Complicated structure

  • Double taxation - taxed twice

    • Taxed with it makes a profit

    • Taxed when it distributes dividends to its stockholders

Just like S-Corporations, C-Corporations file and pay their own taxes. But in the case of C-Corporations, they file tax form 1120. The taxes aren’t passed through to the owner.

To compensate yourself with a C-Corporation you will receive a salary that will have taxes withheld out just like a normal employee. You may also receive dividends, but you will not take an owner’s draw. If you don’t actively work in the C-Corporation, you will receive dividends.

As with the S-Corps, you need to have a reasonable salary. You will receive a W-2 in order to file your tax return.

Summary

It is very important that you understand your business entity so that you are being paid correctly according to the tax structure of your business.

Don’t forget to pay the self employment taxes and quarterly estimated taxes if you are:

  • A Sole Proprietorship

  • Partnership

  • Or a Limited Liability Company

For the Corporations you will need to pay the payroll taxes due that have withheld from your employees paychecks.

Above all else, pay attention to your cash flow and your profit & loss as you decide how much to pay yourself.

Please contact me @ lola@bearnumbers.com for a free consultation.


Deduct All Business Expenses You Can in 2018


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As year end draws to a close, entrepreneurs are asking that big question: What business expenses can I deduct? Remember, you need to deduct all the business expenses you can to lower your taxable income.

You can deduct operating cost of running your business. These operating cost are Business Expenses.  These expenses don’t have to be capitalized or included in your cost of goods sold (cogs). They are deducted in the current year the expenses took place.

Internal Revenue Services (IRS) classifies a deductible business expense as it must be:

  • Ordinary

  • Necessary

It states, “an ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense doesn’t have to be indispensable to be considered necessary.”

It is important to remember that if you have expenses that are partly business and partly personal, only the business part of the expense is deductible.


Business Expenses

  • Bad Debts - someone who owes you money that you can’t collect.

    • Customers who haven’t paid for goods or services

    • Loans to employees or suppliers

  • Auto Expenses - if you use a vehicle to transact business, you may be able to deduct either of the items below. Note: if you use your vehicle for both business and personal, you will need to adjust each cost of the items listed below for business use only. You can not deduct for personal use.

    • Standard mileage rate: 2018 = 54.5 cents per mile

    • Or actual expenses

      • Depreciation

      • Gas

      • Insurance

      • Oil

      • Parking fees

      • Repairs

      • Tires

      • Toll

      • Registration

      • Licenses

      • Lease payments

  • Depreciation - if you purchase or acquire property and it is expected to last more than a year, usually you can’t expense it. You will need to depreciate it. Your CPA will give you all the figures you need on the depreciation.

  • Employee’s Pay - as a sole proprietor you are not an employee and you can’t deduct your own salary or withdrawals.

    • Pay must be reasonable

    • Pay must be for services performed

  • Insurance Premiums

    • Fire, theft, flood insurance

    • Credit insurance that covers losses on your businesses bad debt

    • Employee medical insurance

    • Liability insurance

    • Workers’ compensation insurance

    • Employee life insurance

  • Interest - usually you can deduct as a business expense all interest you pay on debts to your business.

  • Legal and Professional fees - for example

    • Accountants

    • Bookkeepers

    • Lawyers

    • Tax preparation

  • Rent Expense - rent for property you do not own in order to conduct business.

  • Taxes - you can deduct various taxes such as federal, state, local and foreign taxes that is directly associated with your business.

  • Travel, Meals and Entertainment

    • Travel - ordinary and necessary travel away from home to conduct business

    • Meals - can be deducted if your trip is overnight. Most of the time you will be able to deduct 50% of your meal.

    • Entertainment - no longer deductible as of 2018

  • Business Use of Your Home - There are specific requirements to meet for this deduction.

    • Exclusive - this area of your home is used only for your business. For example: you can’t use a guest bedroom for an office and use it when guest come to stay the night.

    • Regular - you must use this area on a continuous basis.

    • This is your principal place of business

  • Other Expenses

    • Advertising

    • Bank fees

    • Education expenses

    • Licenses and Regulatory fees

    • Moving machinery

    • Out placement services

    • Repairs and maintenance to real and tangible property

    • Subscriptions to trade or professional publications

    • Supplies and materials

    • Utilities


Expenses You Can Not Deduct

Usually you can’t deduct the following expenses:

  • Bribes and Kickbacks

  • Demolition expenses or losses

  • Improvements to real or tangible property

  • Lobbying Expenses

  • Personal, living, and family expenses

  • Political contributions

  • Penalties and fines paid to governmental agencies

  • Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs


Summary

There’s a lot that goes into figuring out what expenses your business is allowed to take.  Some items that you might think are expensed may need to be capitalized instead.

For further reading on business expenses, please see IRS publication 535.


Please contact me at lola@bearnumbers.com for a free consultation.

5 Ways To Lower Taxable Income

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Does your head hurt just thinking about taxes? Trying to keep up with all the tax changes from year to year can be very daunting.

Here are 5 ways to help reduce your taxable income.

  1. Don’t forget about carryovers from last years taxes. Some credits and deductions may have certain limits that allow you to use a small amount for the current tax year. You are allowed to carry over the remaining amount to use for future years. Some of these might be

    • Net operating losses

    • Capital losses

    • Deductions for Charitable contributions

  2. Qualified Charity Donations that are tax deductible. These donations can be money, goods, or services. Always get a receipt. The Internal Revenue Service (IRS) gives incentives for these charity donations.

  3. Pay all your bills before year end so that you can deduct all allowable expenses.

  4. Consider hiring independent contractors vs employees. This will help reduce taxes just by not having to pay the employers portion of:

    • Social Security

    • Medicare

    • Unemployment Benefits

  5. You can spend money and save on taxes. By this I mean, if you purchase new equipment, possible needing new furniture and items for your business by using the depreciation or using section 179. Section 179 states for 2018 you can deduct up to $1,000,000 if you purchase a piece of qualifying equipment. The incentive was created by the US Government to encourage businesses to invest in themselves.

By taking advantage of the different tax breaks and opportunities throughout the year, you can reduce your tax rate. Keeping more money for yourself and your business.


Please contact me at lola@bearnumbers.comfor a free consultation.

Stop Mixing Your Personal and Business Finances Together

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As an entrepreneur, I know you have more than your share of items to accomplish on a daily basis. Well, I have one more item you need to do immediately, if you haven’t already. You need to keep your business and your personal finances separate. Commingling of funds aren’t allowed.

How Funds Are Commingled

Commingling of funds are when you mix your business assets with the personal assets  This can be accomplished in several ways such as:

  • Paying personal expenses from your business checking account

  • Depositing revenue from the business to your personal checking

  • Only having a personal checking account and running all your personal and business transactions through this one account

  • All of the above also apply to credit cards and loans


Reasons Why You DON’T Commingle Funds

  1. You want to build your business credit rating. At some point in the future you might want to take out a loan or a line of credit.

  2. You want a correct Financial Reports so you can see how your business is doing. Is your business making money?

  3. You need a clear audit trail of all your business income and expenses for taxes. It would be very hard and time consuming if your taxes were ever audited.

  4. You could miss deductions that could have been used to lower your taxable income. It would make tax time a total nightmare and would cost you more money for someone to clean up and sort through all the mixed transactions.

  5. The lack of looking like a professional and more like the business is just a hobby.

The IRS takes commingling of assets very serious. You could even lose some of the business expenses or income, causing you to pay more in taxes.

LLC, S-Corporation, and C-Corporation businesses have that protection of liability with their personal assets. This could also be lost. It is called “piercing the corporate veil”.


Going Forward

For best practices now and in the future, set up separate business banking accounts, credit cards, and loans.

I know this is extra time that you don’t have, but this could save you so many headaches and money later on down the road.

Look for banks that offer deals for small businesses. As your business grows you could change banks. You have to do what’s best for your business and that is to have separate accounts.

I have an online bank because I didn’t want to pay the fees that are charged to small businesses. Those bank deals are out there. All it takes is just a few minutes of your time to protect your assets.

Please contact me at lola@bearnumbers.com for a free consultation.


Sole Proprietorship or Limited Liability Company?

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Have you decided to start your own business? Are your wondering if your small business structure should be a Sole Proprietorship or a Limited Liability Company?

Choosing a business structure shouldn’t be taken lightly. You should consult a CPA and a business lawyer. I thought we could talk about the basics of these two structures for those businesses in the USA.

 

Sole Proprietorship

The Internal Revenue Service (IRS) defines a Sole Proprietorship as “someone who owns an unincorporated business by himself or herself. You are also a Sole Proprietorship for income tax purposes if you are an individual and the sole member of a domestic Limited Liability Company (LLC), unless you elect to have the LLC treated as a Corporation.”

 

Limited Liability Company (LLC)

The IRS defines an LLC as an entity formed under state law by filing Articles of Organization. Generally, for income tax purposes, a single member LLC is disregarded as an entity separate from its owner and reports its income and deductions on its owner’s federal income tax return. For example, if the single-member LLC is not engaged in farming and the owner is an individual, he or she may use Schedule C or C-EZ.”

 

Advantages

Sole Proprietorships

  • Most popular business entity because of easy formation
  • Less complex - easy to manage
  • Less paperwork to form - easy to maintain
  • Less expensive
  • Tax purposes - individual and business are one in the same
  • No annual compliance with the state

LLC

  • Personal assets are protected
  • Legal entity separate from yourself
  • Flexibility of being taxed as:
  1. Sole Proprietorship
  2. Partnership
  3. S-Corporation
  4. C-Corporation
  • LLC (single member) function more like a sole proprietorship
  • LLC (single member) taxed the same as sole proprietorship
  • Loans and raising capital because assets are kept separate

 

Disadvantages

Sole Proprietorship

  • Unlimited personal liability because you and your business are viewed as one and the same
  • Business assets could be at stake with personal creditors and therefore may be hard to get a loan or raise capital
  • Any loans would be in your personal name and not your business name
  • The death of the owner may result in the termination of the business

LLC

  • Register entity with the state
  • Form articles of organization
  • Paying filing fees which can be hundreds of dollars, varies by state
  • Paying annual fees
  • No commingling business funds with personal funds (shouldn’t be done with any business no matter what the entity is in order to know your true profit or loss
  • LLC’s are subject to state laws governing the LLC

 

Taxes

There are several items that are similar with the Sole Proprietorships and LLC’s. As long as the LLC is a signal member LLC (only you in the business without any partners) then they are taxed the same. The single member is considered a “disregarded entity” for tax purposes. Therefore, for federal tax purposes the sole proprietor’s net business income is taxed on the individual income tax by filling out a schedule C along with your 1040 return.

 

Changing Business Structure

Going from a sole proprietorship to a single member LLC will be an easier process because you have already been in business for yourself. You may have realized that the business is growing and time to restructure so that your personal assets can be protected from your business assets.

The general process will consist of:

  1. Research with your state to make sure your business name is available.  You may have already completed this process if your business name is anything other than your individual name. For instance, your name is John Doe but you have been doing business as (DBA) Creative Web Designs.

  2. File Articles of Incorporation with your state government office. This is often referred to Articles of Organization.

  3. Create and LLC Operating Agreement. Not all states require this document. I would highly advise doing this if you have partners.

  4. Register with the IRS. When registering with the IRS you will need to apply for an EIN (Employer Identification Number). If you already have one instead of using your social security number as a sole proprietor, then you will need to apply for a new one as an LLC.

  5. Open a new bank account. If you had a business bank account with your sole proprietorship, the you will need to close it and open the new bank account with the new EIN. Under no circumstance should you be mixing personal and business accounts.  If you choose to mix your personal and business transactions then the IRS may not allow you to take certain business deductions. You could also lose the legal liability protection of your business. So please, open a business checking and credit card accounts.

  6. Business License and Permits may be required by your state, county, and city to see what license and permits you need to run your business.


 

There is a lot to think about when forming your business structure. Sole Proprietorship and LLC are the most common entities. There are some similarities but it is important to understand the differences.  You need to know what will be the best structure for your business and circumstances.

As I mentioned earlier in the blog, seek advisement from a CPA and a business lawyer.


Please contact me at lola@bearnumbers.com for a free consultation.