Starting a business
(revised November 2009)

BEFORE ACTING ON ANY OF THESE TOPICS,
CONSULT WITH YOUR PROFESSIONAL ADVISOR.

Corporation as your business entity

1) the advantages are the following: .....corporation offers limited liability (maybe not - see below) .... also, corporate formation is relatively inexpensive - $100 to $500 generally

2) there are a number of disadvantages:

• the operating costs are high - there will be more tax filings and payroll tax returns involved. Your accountant will love the additional fees.  Hopefully it will be me!
   
• .....your income tax bill will probably be higher
   
• .....if anyone is injured, you still could be sued personally; basically, anybody can be sued.  Also, if you are found to be personally responsible, you will held liable.  

.....close attention to corporate formalities (i.e. keeping corporate minutes) is advisable.  There is a legal concept called "piercing the corporate veil".  If the "corporate veil is pierced", you will be held personally liable.

Conclusion -  unless there are issues concerning liability, as a general rule I don't feel that starting a business as a corporation is advisable.  Since every situation is different, you really need to get some professional advice. 

Worried about personal liability?  Buy a good insurance policy; you need to talk to your insurance agent. Also, you need to talk to your attorney.

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Limited Liability Company (LLC)

1) LLCs have a number of advantages including:

• LLCs have all of the advantages of a sole proprietorship, because for tax purposes, the LLC is treated as a sole proprietorship in most cases
• LLCs offer the same protection against creditors and lawsuits as do corporations.  However, you could still get sued and in many circumstances, you would still be personally liable.

2) LLCs have one major disadvantage: they are expensive  - the fees for setting up an Illinois LLC go anywhere from $1,000 up to $2,500 and even higher! 

Conclusion, I generally do not recommend an LLC for a new business. The business may not last long enough to recoup the initial high cost.
 
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Sole Proprietorship

There are a number of advantages to being a sole proprietorship:

• there are virtually no setup costs - you already are a sole proprietorship!
  
• your income tax bill will probably be less
• there are fewer payroll and income tax returns involved, and
• you will probably pay your accountant less|
  
  

There are also a number of disadvantages to a sole proprietorship:

• YOU are liable for all debts of the business, and
• YOU could be sued

Conclusion - unless there is an issue with personal liability, I recommend a sole proprietorship in most cases. However, you need to get liability insurance that includes protection against damanges and legal fees. 

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Home Owners Insurance won't cover you - even if you plan on operating your business out of your home, most home owner's insurance policies will not cover the business activities.  Also, if you plan on using your automobile for the business, your basic auto insurance policy probably won't cover your business driving.   In both situations, you need to contact your insurance agent.

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Generally, salary that you pay to your employees is fully tax deductible against your day care income.  Assuming that your children and spouse will also be working in the business, there are a number of advantages to paying them a salary.  If you are one of my clients, I can discuss this topic with you personally; all situations are different - there are no cookie cutter answers on this one!

There are a number of record keeping and reporting requirements for salary payments.  These requirements are discussed next, even for salary paid to your own children. 

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Form I- documents the fact that the employee is either a US citizen or legal alien with a work  permit.  For a copy of this form, press below.

If you are hiring a non-relative, you should fill out the form and keep it in the employee’s personnel file along with copies of any related required documentation (e.g. social security card, voters registration card, green card, etc.).   With all the publicity concerning non-documented workers, I expect greater enforcement in the future.

Press here to download Form I-9.

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 New Hire Report

New Hire Report - this form is used by the government to track down dead-beat dads. The form is required to be filed within 20 days of the hiring date of a new employee. There do not appear to be any exceptions, even if the new employee is your 5 year old son or daughter. The penalty for not filing this report ranges from $15 to $500.

I recommend that you file this form. For example, if you hire family memgers, filing the New Hire Report is proof that are treating your (family member) employees as bona fide employees. For downloading these forms:

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Forms W-4

 W-4 and IL - W-4 - this is the form that employees use to declare the number of exemptions they are claiming for withholding tax purposes.  For downloading these forms:
 

I recommend that you have all employees (including your family employees) fill out these forms before their first payroll and at the beginning of each year

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There are specific quarterly and annual reporting requirements if you hire employees:

Requirements to get started:
 

you will need to get an Employer Identification number from the Internal Revenue Service.  You can use their toll free number ((816) 823-7777) to obtain this number. 

you will need to register with your state revenue department. 
 

• For Illinois, you need to fill out Form IL REG-1.  Press here to download this form.
• For Indiana, you need to fill out Form BT-1.  Press here to download this form.
   

Both states also have online filng of these forms:

Illinois go to  - https://www.revenue.state.il.us/app/ibri/   

Indiana go to - https://secure.in.gov/apps/dor/bt1/

If the only employees that you will be paying are your spouse or your children who are under 18 years of age, you will probably won't be liable for unemployment taxes. 

If you expect your payroll (other than spouse or children discussed above) to exceed $1,500 per quarter, you will probably be liable for unemployment taxes.  In this case, I suggest that you register with the state as soon as possible. 

• For Indiana, you register with Form 2837.  Press here to download this form.

For Illinois, you register with Form UI 1. Press here to download this form.

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Quarterly requirements:
 

1) You will have to file Federal Form 941 - Quarterly Federal Payroll Tax Return.  The Internal Revenue Service should automatically send you these forms.

If you pay wages, you have to file Form 941 even if you do not owe any payroll or withholding taxes.  For example, if all of your wages are exempt from payroll taxes (e.g. salary to your child under 18 years old), you should still file quarterly payroll tax returns even though you do not owe any taxes.

2) Illinois and Indiana Unemployment Tax Returns.  If you registered with the respective states, they will send you blank quarterly returns to be used for filing.  I suggest that you file these returns on time, even if you owe no tax. 

3) - Illinois and Indiana withholding tax reports. 
 

If Illinois applies, you may have to file Form IL-501 - Illinois Quarterly Payroll Tax Return.  Press here to download this form.  The state revenue department may notify you that your filing requirement of this form is annual instead of quarterly. 

If Indiana applies, you will have to file Form W-1.   The Indiana Department of Revenue will notify you of your filing requirements after you submit Form BT-1 discussed above.

All quarterly tax returns are due by the end of the month following the end of the quarter. The specific dates are as follows:
 

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C) - Annual requirements:


 You will have to give W-2s for all of your employees by January 31^st of the following year. There are no exceptions, not even for your own children.

Indiana requries a Form W-3; Illinois does not have any W-2 reporting requirments

You may have to file Form 940, Federal Annual Unemployment Contribution Report, by January 31^st of the following year. You do not have to file this form if all wages are to your spouse or your children who are under 18 years of age.  The Internal Revenue Service should automatically send you this form.

You will have to file Federal Form W-3, Federal Annual Wage and Withholding Report, along with W-2s by February 28^th of the following year. 
 

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The following is my list of "dos":

• Open up a separate checking account for your business.
• Deposit all receipts (both checks and cash) from the business into this account. 
• Write checks for all direct business expenses from this account.  If you happen to pay a business expense from your personal account, take a check from the business account (to your personal account) to cover the expense.
• When paying a credit card bill, write a business check for the business portion of the bill and write a personal check for the personal portion of the bill.
• To pay your personal expenses, transfer funds (by writing a business check) from your business to your personal account.
• Reconcile your checking account every month - if you don't and the bank makes an error in their favor, the bank may not be responsible.
• Record all checks written.

The following is my list of "don'ts":

• Don't use cash to pay expenses.
• Don't use your business checking account to pay for personal expenses.
• Don't forget to record all checks written.

Note - some banks charge much higher fees for "business accounts".  We suggest that you either switch to another bank (or a S&L or a credit union), or open up a second  personal account for your business.

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7 year minimum for bank statements, canceled checks, deposit receipts, payment receipts, attendance reports, bills.  The general statute of limitations for most tax items is 3 years from the later of:
 

• the due date (including extended due dates due to extensions), or
• if later, the actual date that the return is filed.

The statute of limitations is extended to 6 years if there is an omission of more than 25% of gross income.   Also, if a return contains a fraudulent item (and the IRS proves it), the statue of limitations is forever!

4 year minimum for payroll records. Generally, there is a 3 year statue of limitations that is similar to the general rule for statute of limitations affecting income tax returns.

Forever - copies of income tax returns, IRS audit reports and related correspondence, home purchase and improvement information

If in doubt, keep the records.

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In every IRS examination I have had for the last 5 years, the examiner wanted to see written documentation concerning business miles and total miles.

First, you should keep a log in your vehicle and record the purpose and mileage of each trip. If your driving habits remain fairly constant throughout the year, you can keep a log for a few months and base the entire year’s auto use on the results for the logged months. The easiest way to deduct auto expenses is by using the per diem method. Under this method, you are automatically allowed a specific deduction (presently 36.5 cents per mile) for each business mile driven in your automobile.

Second, you need to record the odometer readings at the beginning and end of each year. 

Third, keep all repair bills.  Repair bills normally record odometer readings when the car is serviced.  If your tax return is examined by the IRS, the repair bills are further evidence of the actual miles put on the automobile.

What auto miles are deductible "business miles" and which miles are not?  Generally, if you are driving from home to a customer or some type of temporary business location, the mileage is considered personal and not deductible.  This type of mileage is considered to be commuting. However, the mileage from the first business stop to the second (and third) is considered to be business miles. If you have a "home office" in your home that qualifies as a business location, your mileage from your home to the first stop may also qualify as deductible automobile mileage. If you are one of my clients,  conatct me for more information.

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