Michael J. Riordan is a certified public accountant who has been in business in San Jose for more than 35 years. He gave a crisp briefing on “Bootstrapping a Service Business” at the Thursday Oct 8 PATCA meeting. He gave a great set of tips, here are my notes:
- Don’t give out your Social Security Number (unless you are a W-2 employee, in which case you have to). Apply and use an EIN (employer identification number). You can get on in ten minutes on-line at the IRS site: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online
- Open a separate bank account for your business (it can be a “personal account” unless you need business account features).
- Open a separate credit card for business, or reserve the use of one of your personal credit cards for business.
- Keep good records, keep receipts for expenses, keep a log of automobile miles (it’s more than $0.50 a mile in 2015) and deduct them. There are also smartphone apps that can log expenses and auto travel.
- Have an operating plan for your business that you adjust at least annually. If you don’t write down your goals and expectations at a high level it’s hard to learn from past results.
- Consider your insurance needs and maintain proper insurance:
- General Liability – often required by large firms if your work brings you on-site
- Health insurance – new ACA offers some complications here
- Worker’s compensation – required if you have any employees
- Set aside an appropriate portion of your income for taxes. Pay estimated taxes. Use a payroll service or make sure you always pay payroll taxes.
- Understand your cash flow and cash needs: plan ahead to avoid or minimize need for borrowing.
He also offered a brief review of business entities to operate under.
- LLP: Limited Liability Partnership used if your professional licensing requirements don’t allow you to form a corporation.
- Pros: ease of formation, two heads are better than one, flow through income.
- Cons: self-employment tax at 15.3%, minimal fringe benefits allowed as a deduction.
- C Corporation
- Pros: eligible for self-insurance, less audit risk, health and disability insurance deduction.
- Cons: 35% flat Federal corporate tax rate, California minimum tax.
- S Corporation:
- Pros: flow through income tax (no 35% Federal tax or “double taxation”), minimizes the 15.3% self-employment tax by taking income as a blend of W2 and dividend.
- Cons: minimal fringe benefits allowed as a deduction
- LLC: limited liability corporation
- Pros: none (do not confuse with LLP)
- Cons: CA tax on gross (use sub-S if you want a flow through entity)
About Michael J. Riordan, CPA
Michael J. Riordan has a degree in accounting from Santa Clara University and an MBA from DePaul University. He was tax specialist with Ernst and Young. In 1981 he launched his own accounting practice providing services to individuals, partnerships and corporations. Since 1990 he has been an evening instructor of accounting and tax courses at DeAnza College. His offices are located at 1390 S. Winchester Blvd, Suite C, San Jose, CA 95128. He can be reached at 408-379-6966 or firstname.lastname@example.org
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