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Starting Off On the Right Foot

Then I asked her a few questions. Is she thinking about going into business with someone else? Are lawsuits common in her field of business? Is her goal to create a business and develop it to the point at which it can be sold? Does she have concerns about not being taken seriously unless she incorporates?

© 1998, by Jan Zobel, EA

My tax client, Katherine, called yesterday. "XYZ Corporation is laying me off," she said "and I've decided to start freelancing as a computer consultant. Is there anyplace I need to register or anything official I need to do?"

After congratulating Katherine for having the foresight to ask me this question now rather than when I was preparing her tax return next March, I informed her that anyone who is freelancing or working as an independent contractor is considered, for tax and other official purposes, to be the owner of a business. There are some decisions, I told her, that need to be made before she gets started.

For example, had she considered what legal structure to choose for her business? The simplest and least expensive way for a new business to operate is as a sole proprietor and about 80% of all businesses are set up in this way. Since a sole proprietorship can consist only of one person or a married couple in business together, any other two or more people wanting to be in business together must choose another form under which to operate. I told Katherine that if she chooses to be a sole proprietor, she'll be reporting her business income and expenses as part of her individual tax return.

Then I asked her a few questions. Is she thinking about going into business with someone else? Are lawsuits common in her field of business? Is her goal to create a business and develop it to the point at which it can be sold? Does she have concerns about not being taken seriously unless she incorporates? A 'yes' answer to any of these questions would have led to my recommendation that Katherine talk further with me, an accountant, or an attorney about whether a corporation, a partnership, or a limited liability company might be a better legal structure for her business

Next we talked about registering her business. Katherine isn't working as a building contractor, a real estate agent, a psychotherapist, or in any other occupation that requires a state license. Nor is she opening a restaurant or other food-related business that requires health department licensing. However, since she expects to sell some computer supplies to her customers, Katherine needs to get a resale permit from the California State Board of Equalization. This permit allows her to pay no sales tax on the supplies she's buying to resell, but it also requires her to collect sales tax from customers and, on a regular basis, remit that tax to the state.

Katherine emitted a groan as I continued through the list of registration requirements. As with most localities, the city in which she will be working requires that she have a business license. Also, as I told Katherine, if she's planning to operate the business from her home, she needs to check with the business license office or city building department to see if there are any zoning restrictions.

And, I continued, Katherine will need to file a fictitious name statement with the county clerk if the name of her business will be something other than her name. Even if she decides to call her business Katherine Lane and Associates, she needs to file a fictitious name statement so that there are documents showing who owns the business. She also should check the county clerk's records to make sure there isn't another business in the county registered with the name she's chosen. In addition to paying a small fee to secure her business name, Katherine will need to run a legal notice in the local paper to inform the public of her new business entity.

"What about the IRS?" Katherine then asked, "I suppose there's paperwork to fill out for them too?" Fortunately, because she's planning to operate as a sole proprietor without employees, I was able to answer that the IRS doesn't need to be notified about the new business. If Katherine had chosen to operate as any other legal entity (corporation, partnership, or LLC) or if she was hiring employees, she would need to fill out IRS form SS-4 to get an Employer Identification Number (EIN). But, as a sole proprietor without employees, her social security number is sufficient and the IRS will learn about her new business when Katherine files her 1999 tax return.

Which is not to say, I quickly interjected, that she can ignore her federal taxes until it's time to file her tax return next April. Our tax system is a 'pay as you go' plan with taxes due at the end of the quarter in which income is received. Once Katherine starts having a profit from her business, we'll need to talk about her making quarterly estimated tax payments to the IRS and possibly also to the state Franchise Tax Board.

Sensing that by this time Katherine was feeling a bit overwhelmed by the answer to her initial query asking if there was anyplace she needed to register her new business, I decided we'd covered enough for today. We'll talk another time about business bank accounts and credit cards, recordkeeping, audits, tax deductions, and the other tax and financial information Katherine will need to keep her business on track.


The above is an excerpt from Jan's recently revised book, Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping (Adam Media Corporation) which is available for only $8.76 at Amazon.com.

 
 
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