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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?
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?"
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.
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
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
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.
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
recently revised book,
Her Own Business: The Self-Employed Woman's Guide to Taxes and
Media Corporation) which is available for only $8.76 at