Financial Planning for Launching a Small Business
Are you considering making the transition from the role of employee to small businessowner in this evolving economy? Start by strategizing and prioritizing your financialplanning responsibilities.
With the collective guidance of a qualified tax adviser and CERTIFIED FINANCIAL PLANNER TM professional from the Financial Planning Association, you can assemble a well-organizedsystem of tracking what you spend to produce income. In addition, you can sensiblysave money by learning more about eligible tax deductions you should take for yourself-employed business.
Apply the following pointers and perspectives to efficiently develop and manage yournew business:
- As a small firm owner, you are accountable for the accurate and timely filing ofall taxes owed on income and employment taxes for your workers. Utilize financialmanagement software, such as Quicken or Quickbooks, to help you with implementing anongoing system that captures income and expenses. Remember to document all cashtransactions and stash receipts in an identified file folder or in labeled envelopes(marked with the month and year).
- Paying additional taxes and being able to claim tax deductions are both new challengesand opportunities for you as a self-employed business owner. Make sure that youfile quarterly federal and state estimated taxes. Further, if you have employees,you will need to withhold taxes from each paycheck they receive and make timelypayments to the IRS and the proper state authorities. Verify that you also sendpayments to cover Social Security tax, Medicare tax, and any other mandated localpayroll taxes withheld from your paychecks.
- How can you optimally plan for taxes while protecting your business and personalassets against potential liability? Consult with a seasoned attorney or tax professionalspecializing in risk management to figure out the type of entity (i.e. SubchapterS Corporation, C Corporation, Limited Liability Company, etc.) that would be mostappropriate for your business activity and financial situation.
- Do not commingle business income with your personal spending. Open a separate bankingaccount in the name of your business and obtain an accompanying Federal EmployerIdentification Number (EIN). Establish credit now with this EIN in your businessname apart from your own personal credit.
- What types of retirement plans are available for you to allocate a substantial portionof your net income on an annual basis? Realize that you have a diverse array ofchoices for tax-deferred savings of self-employed earnings contingent on your needs.You can decide to significantly fund a Simplified Employee Pension (SEP-IRA) planor Keogh plan up until the tax-filing deadline and deduct these contributions onyour personal income tax return. Alternatively, depending on your level of self-employmentincome and tolerance for administration expense, you can set up a Solo 401(k) planor Savings Incentive Match Plan for Employees (SIMPLE IRA) with the total fundingamount comprised of employer and employee contributions. Be certain you understandthe rules and penalties that apply to taking your money out of these plans early.
- Can your children set up a Roth IRA to contribute wages from a job and begin savingfor retirement? Employ your kids and encourage them to fund a Roth IRA with theirearned income. Keep organized records of earnings, including a log of the datesand hours your children work.
- With health insurance, you can elect to continue your existing Consolidated OmnibusBudget Reconciliation Act (COBRA) coverage from your previous employer's planfor as long as possible (up to 18 months, or more in some states). Be cognizantthat you can deduct 100 percent of your health insurance premiums up to your self-employedbusiness' net profit. Recognize that this deductibility is not permitted ifyou are eligible for health care coverage through other means, such as your spouse'semployer. For family members who work for your small business, you may be able todeduct full medical premiums, including some long-term care insurance.
Reap fulfilling professional rewards and achieve lifelong dreams by utilizing thesebeneficial tips to launch a successful small business!
FPA member Elaine King , CFP ® , CDFA TM , is Chairmanof FPA of Miami-Dade and Author of Family & Money Matters, La Familia y El DineroHecho Facil. FPA member Philip Herzberg, CFP ® , AEP ® ,MSF, is President-Elect of FPA of Miami-Dade and Director of Media Relations &Public Awareness for FPA of Florida/Miami-Dade. They serve on the Estate PlanningCouncil of Greater Miami Board of Directors.