Hi, Brandon Davis with Davis CPA Group. Today I want to talk about starting a business. So on my previous videos, I’ve discussed different entity choices and things of that nature, but today I’d like to dive into … because it seems like I’ve had a lot of meetings of late about what it takes to start a business, things to begin thinking about, and what have you. So it’s going to be a pretty exhaustive list and I think there’s some things that we’ll talk about in this video that we’ll be able to expand on at a future date too.
So basically, I want to put up Starting a Business here. One of the first things you’ve got to think about when you’re starting a business is considering what type of entity you need to be. Like I said, I’ve got videos about choice of entity. Basically, are you going to be an LLC or S corporation or even what they call sole proprietorship? Meaning it’s a very simple business, you just use your personal name or you use your tax ID number, if you will, your social security number, to kind of report the income and expenses of your business.
So let’s say for example, that in this case we decided that we’re going to be an LLC. So the first step I’ve got to do is I’ve got to register my business name with the Secretary of State’s office. Usually you do that, most states have a Secretary of State that basically is the entity of a state, where you register the legal presence of your business in that state.
So for example, here in Missouri, let’s say we’ve got a new business that we’re starting and we’re going to sell toys. So let’s call this Toys, LLC. We’re going to be real creative here. I am a CPA, so the creativity kind of is limited. So we’ve got the Toy, LLC that we’re going to do and we’re going to sell toys to people, that basically we’re going to buy from other people that manufacture them, then we’re going to retail those.
So we’d go to Missouri Secretary of State, handwriting’s not very good here, and we would register our LLC name. A lot of times you’re going to want to use an attorney to do this, because they can put together the proper paperwork to get you registered with the state properly, with the proper name and filings and such. Also what they’ll do, is they’ll give you the legal documents you need to create that entity. Again, if you go to my LLC video, you’ll see some more details about that.
But once you register your business with the Secretary of State, now it’s lie, now it’s a legal entity and it exists. So the next step you’ve got to do is you’ve got to get with a CPA or somebody else to help you get what’s called a tax ID number or what the IRS calls an EIN number, which stands for Employer Identification Number. Even if you don’t have employees, that’s just what they call it.
So this tax ID number now, so now we’ve got our entity set up, Toy, LLC, which we set up with the Missouri Secretary of State. The next thing we’ve got to do is get an EIN number, which we get from the IRS. That’s basically our tax ID number that we’re going to use to transact business for Toy, LLC. So now we’ve got these two things set up. We’ve got our entity created and we got our legal documents that are our good attorney friends prepared for us and we have a tax ID number.
Now the next step would be to open up a bank account. Because one of the things you want to be cognizant of whenever you have a business, is not to commingle your personal funds with your business funds. Couple reasons. One, it makes it tough for record keeping whenever you want to figure out how profitable you are. But also, two, there’s some liability issues. Say for example, you created Toy, LLC and you wanted to have that business, and you created the LLC to kind of give you some legal protections to say, maybe one of your toys injure somebody. So you have someone that comes back and blames you for selling them a faulty toy or maybe it broke and they’re really displeased with you.
Well, if they were to sue your LLC or bring a claim against your LLC and you co-mingle your personal assets there, then a good attorney and a judge may even say, “Well, look, you’re treating this LLC with your personal assets, so it’s like you don’t even have a business, so now some of your personal assets could be at risk.” Now that’s a little bit of legal advice, you want to consult your attorney about that. But that’s one reason that you want to open up a bank account.
The other reason, again, like I said, is just record keeping. That way you got all your income and your expenses going through one spot, easy to find, easy to go and kind of rebuild your financial statements. So the next step then would be your bank account.
So once your bank account’s set up then, we’ve got to get ready to kind of operate the business. So we’ve got to think about things like how are we going to account for income expenses? Are we going to use a spreadsheet, where we just kind of put in our revenues, as we send out invoices, or book our sales, as we sell our toys? Then we’ve got to then map out and track our expenses. So every time you write a check to pay the rent or pay the electric bill or buy inventory in this particular case, then you would need a way to account for all of that.
The first start is having everything go through your check register and your bank account, but secondarily, you might want to be a little more sophisticated, where you get an accounting software. So the next consideration you want to do is how to track expenses and income. Expenses and income. So again, we could use something simple like a spreadsheet or you could get more sophisticated and use a software like a QuickBooks. You can actually Google QuickBooks or QuickBooks Online, those are great softwares. We support those and really are a champion for what they are able to do for you.
So now that you’ve got these things set up, you’re getting close, but you may not be done yet. There’s other things you’ve got to consider. So once you’ve got your Secretary of State filing, you’ve got your tax ID number, you’ve got your bank account and then you’ve kind of figured out how you’re going to track your income and expenses, some other considerations you got to think about next are what other filing requirements may I have? If you’re going to be operating in the city limits of maybe say Joplin, Missouri, where I’m located or inside of a County, sometimes there’s County and city filings you have to do or business licenses you have to obtain.
I know in the city of Joplin, you’ve got to obtain a business license. So you get all those things set up to create your entity, and so the next step, and I’m just going to, for space here, I’m going to go add onto our list here. But you might need to get a city or County license, depending on where you live and what counties that you work in. So that’s another option you’ve got to consider and think about, because sometimes you will forget about that.
The other thing too, particularly at the County level, once you start buying business assets, say for example, you buy some computers or you buy office equipment or you have manufacturing equipment you have to use for your business, or say on this toy company that we’re talking about right now, we’re going to sell something, that we also maybe assemble some things and there’s some tools required to do that. Well, those assets that you’re buying, you’ve got to register those with the County.
So right now you may be used to paying personal property taxes, for example, on your cars and boats and what have you. Well, personal property taxes apply to assets inside of the business as well. The real estate, obviously the County assesses that automatically, but on business assets, you’ve got to voluntarily report the information and every year keep it updated. So that’s something else that a lot of people forget to do, is set up for the County taxes.
There’s something else you got to think about too, in the fact pattern that we’re looking at here, is we’re selling a toy. So we’re selling something to an end user. Well, anytime you do that, those transactions are subject to sales tax. So now we’ve got another registration we’ve got to do with the state that we’re in. So we’ve got the Secretary of State, which that’s where you do your legal filings to create your entities, which I just talked about in my previous list here.
The other thing you’ve got to register with your States is usually with what they call the Department of Revenue. The Department of Revenue is where all the taxing is done, where they collect sales tax, they collect consumer use tax and business use tax, which we’ll talk about that, and they also collect withholding taxes. Say for example, we have employees at some point.
Right now, let’s talk about sales taxes. So what you would do, is you would register then, for example, in the state of Missouri, with what they call the Department of Revenue in the state of Missouri. Some different States have different names. Oklahoma’s the Oklahoma Tax Commission, I think Arkansas is Department of Revenue. But anyway, they all have different, but similar names. So you can always look up, go to the state, they’re all going to have a website that talks about how to register in their state.
But as part of that process of registering with the Secretary of State, I kind of highly recommend that you just go ahead and step on in and get your registrations done at the income level as well. So that’s another registration we’ll have to do, is a sales tax registration. But on the sales tax, we’ve got to take that a step farther, because then we’ve got to figure where our sales tax rates are. You may be thinking, “Well, how do I figure that out?” Well, it’s different in different States. So what you got to do is you got to look at your locality or where you’re located.
So for example, if you’re located in the city of Joplin in Jasper County, Missouri, then you’ve got three levels of tax. You’ve got a state sales tax that you have to calculate into your sale, you’ve got a city sales tax and you’ve got a County sales tax. Now if you’re outside of the city limits of Joplin, you may just have a County sales tax and a state sales tax. But you use your locality of where those sales take place to figure out what your sales tax rate is, to then apply to those sales, you collect that whenever you make a sale.
So let’s say you sell something to somebody for 100 bucks and the tax rate’s 8%, well, you’re going to collect that $8 above and beyond the $100 that you basically charge them, and then you’re going to submit that eight bucks to the state. So, that’s basically what you have to do, and you have to file those on a regular basis. Those filing timelines are based on the amount of tax that you collect a lot of times. Most people file on a monthly basis, but sometimes you have to file those sales tax returns on a quarterly or annual basis, if your sales tax liability is much less.
One thing else that I’ll talk about when we’re talking about sales tax, is even if you have no sales at all, say for example, you created your entity, I see this all the time. You create your entity, you register with the state of Missouri or whatever state you’re working in. Everything’s up and running, but you’re not ready to pull the trigger yet. Say maybe it’s another two or three months down the road before you actually start selling something. Well, if you don’t file zero returns to keep your account alive and active, sometimes the States will come back and they’ll actually assess you an estimate of sales. They may think, “Well, your type of business, you should have sold $1,000 worth of stuff,” and they’ll send you a bill.
Sometimes I’ll have clients call me and be like, “I got this bill, I haven’t done anything yet.” So we have to go back in, file a zero return, say, “Look, State, but they weren’t in business yet. Appreciate your willingness to actively try to put sales on us, but we’re not quite there yet.” So that’s something I like to always tell my clients too to be careful of, and say once you activate these accounts, you’ve got to continue to file returns, even if there’s no activity, to keep the account active and make sure the state is aware that we don’t have any sales to report.
So let’s kind of recap here. So step one, we’ve got to figure out what kind of business we’re going to be. In our case, we’re going to be an LLC. So in step two, we’ve got to file the appropriate information with the Secretary of State’s office, so SOS here, to create our entity, okay? Then the other thing that we talked about doing is getting a tax ID number with the IRS, also called an EIN. So we’ll get that. Then the next step was open up a bank account. Get that ready to go, because you’ll need this information to get that done. Register with the state Department of Revenue, for maybe sales tax, use tax.
So what’s use tax? Use tax is basically a sales tax that you self-charge. For example, if I have a business here in Missouri and I buy a piece of equipment that’s manufactured in Oklahoma to use inside my business, I’m the end user of that. But since I’m an out of state and user of that, the company in Oklahoma may not charge me sales tax, because they’re not domiciled here in the state of Missouri.
So when that asset shows up, I’ve got to report that I received an asset, I didn’t get charged sales tax on it, I’m using it in my business, so I am the end user, and so I’ve got to basically self-report that asset and pay use tax on that. So that’s what a use tax is, is basically a self-reporting, if you will, of sales tax. Then also, you would pass this, you’d want to make sure that you keep up on your filings. Then also look at a QuickBooks or some type of accounting software to keep track of your income and expenses.
So now the business is started, we’re kind of moving along and we’re selling our product, we’re keeping track of our expenses. The other thing that’s really important to do is to do some sort of planning. Meet with a professional or a CPA or something to be able to kind of make sure that we’re doing things properly on a day-to-day standpoint, we’re keeping track of the proper expenses and we’re making sure that we’ve keeping cash in place to pay for taxes and things of that nature.
That’s kind of basically what I’d like to talk about when we look at starting a business. The only other piece of this that I haven’t talked about is onboarding employees. So I want to talk about that for just a minute here. So let’s say our business is growing and we need help. So when we onboard employee, there’s certain information you’ve got to get to do that. So the next step in our business here as we’re starting is employees.
So we’d need to have them fill out the information to make sure they’re, one, they can legally work in the United States. Then two, we have the proper data to withhold taxes and things of that nature. Now one thing you might have to do is go back to the state and register for a withholding tax. Now for example, in the state of Missouri, whenever you register with the Department of Revenue rather, and you get your sales tax ID number, that Missouri Department of Revenue number is still alive. It’s still good to use, it’ll be the same number you use for your withholding.
But you still got to register with the state of Missouri to tell them, “Hey, I’ve got employees now and so I’m going to start having withholding taxes.” Because it’s a different form that we file, it’s called a Form 941. As you file it quarterly with the IRS for your income taxes holdings there and you file it generally monthly for the States. For the state of Missouri, it’s a monthly filing. So you may have to go back and register again. So register again with the Department of Revenue to add a withholding account to your current Missouri number or whatever state you might happen to be in.
The other thing you want to do is collect the proper information. There’s some forms you’ve got to get called a Form I-9, that basically is a form that you walk through and you can basically make sure that someone can legally work in United States. You’ve got to get two forms of qualified identification. You can look up on the Internet and you can find this Form I-9, it’s pretty simple to find. But basically you get two forms of ID, they sign the form, the employee does and also the employers to verify this data, and they are legal to work in the United States.
Another thing you’ll need to get is what’s called a Form W-4. This form is used to then figure out the withholding information for your employee as you pay them. So say for example, they might be married, they may be single, they may have some dependence and so they fill out that W-4 form and say, “Okay, I want you to withhold X number of dollars out of my check to help cover their tax liability at the end of the year.” So what you’ve got to do then in order to send that in, is you’ve got to register another time with the IRS and get what is called an EFTPS account. You can even look that up too.
But basically it’s a Electronic Funds Transfer Payment System, I think is what it stands for. Anyway, that account is used then to remit your payroll taxes to the IRS. The beauty behind some of those accounting software I talked about before, if you use a QuickBooks Online or what have you, you can set up employees in there, you can set up your EFTPS information and your state ID information, and it’ll do a lot of those calculations for you.
We’re a big fan of using what’s called QuickBooks Online, it’s full-service payroll product, because they kind of do all that stuff for us. They make sure the taxes get paid, they make sure the filings are on time and they make sure that everything is calculated properly for your employees. So that’s the other thing that you got to think about and these are kind of the steps in going through and setting up your employee.
Obviously, then you have to set up their pay rate, your pay schedules, and how you’re going to do that. I’m a big fan of having a, what’s called a payroll lag, meaning maybe you pay every two weeks. So we might end pay on Sunday of this week, but we’ll pay Friday for those Sunday hours. It gives us a week to make sure the payroll is right, get everything filed properly and go from there.
Well, those are the things that you really want to think about starting a business. I know there’s other things out there that would, depending on someone’s particular fact pattern, we have to think about or add into it. If it’s a certain specialty industry, they might have to get special licensures with a state or what have you. So, this is kind of a high level and something I wanted to just kind of talk about. Happy to visit with people in my office at Davis CPA Group, if you have more questions or want more details. Thanks.