7 Tax Saving Tips For Home Based Businesses

about once a week we form a small businessfor a new small business owner. an entrepreneur will contact us and form an llc or an s-corporationor potentially some other type. i normally sit down with them for about an hour and talkthrough a variety of legal issues. i am going to condense that down to a short summary versionhere. the first issue is which type of businessentity should i choose? most businesses that are being started are going to be one of twotypes and llc or s-corp. when i say s-corp i mean a corporation which elects to be taxedas a subchapter s-corporation. in other words, rather than paying taxes at the corporatelevel and then again at the owner level, the tax passes through the s-corporation and areonly paid at the owner level. an llc also

has that same approach. now you might say, what is the differencebetween the s-corp and the llc? they both provide limited liability equally, however,the s-corp permits to deduct money, under certain circumstances, from self-employmenttax. that will save you about 15%. so let me give you an example. let’s say you area business that makes $100,000 in profit per year. so that is you may have $1 million intotal sales, but $900,000 in expenses so only $100,000 in profit. in an llc that entire$100,000 in profits would be subject to regular income tax, as well as self-employment tax,which is 15%. so if you are in a 35% tax bracket, plus 15% self-employment tax. you may be payingclose to 50% in taxes. so for $100,000 in

profit, $50,000 in taxes. it is a lot of money.in an s-corp you can avoid some of that self-employment tax. again that is the 15% portion. here ishow. in an s-corp you determine what your fairmarket salary would be, let’s say it would be $50,000. that means on that first $50,000,you are going to pay self-employment tax at 15%, but on the remaining $50,000, you willnot pay a self-employment tax, which means $50,000 will be free of a 15% tax. that’sabout a $7,500 actual cash savings in taxes. now you might be asking yourself, what ifi am interested in having an llc, is there any way to be taxed as an s-corp? the answeris yes and in fact many small business owners start out as an llc, and then you can electto be taxed as an s-corp in the beginning

of the calendar year in which it is to apply. so you might start out being taxed as a defaultllc, the default is sole proprietor, and then two years down the road elect to be taxedas an s-corp once your profits justify it. the one drawback to an s-corp is you needto pay and report your taxes quarterly. so essentially you’re paying a payroll serviceto do payroll withholding and that can be annoying and it also has some costs involved.so an s-corp can save you money, but it’s not worth doing unless you’re making, asprofit, substantially over what you would be paying yourself in wages. i realize this is a little tricky. a businessattorney or cpa can help your through your

situation and help you figure out which entityand which election is right for you. once you have the right entity set up, you’llwant to look into getting an ein, that’s a tax id for a business. it is free. you cancall the irs, you can file online or you can do it by fax or mail. again it is free. theeasiest way and the preferred way is just fill out the form online, you’ll get a pdfright there with your tax id. you can then go to the bank and open up a bank accountin the name of your llc or corporation. don’t get the ein until after you have gotten yourcorporation or llc because if you get it now you’ll have to get it in your own name.after you form the business, you can get the ein in the name of the business and that einwill now be the tax id, kind of like the social

security number for the business. if you will be charging sales tax when yousell products to your clients, you’ll need to get a sales tax id number from the stateof minnesota. that is free you get it from the department of revenue just go online.you can get it right there by filling out an online form. then you collect that salestax and you pay it into the department of revenue. if you have multiple owners in your business,you’ll need an agreement that sets forth a structure for how you make decisions, howprofits will be distributed. what if someone wants to get out of the business? how willthey be bought out? can you sell your shares

of the business? what if you get divorced?die? become incapacitated? file for bankruptcy? what is the impact on the other owner? thereare all sorts of scenarios that come and let’s face it, at some point you will leave yourbusiness. if it’s not by death it will be sometime sooner. maybe you just want to getout, maybe you can’t get along with each other. you need a buy sell agreement and bylaws and an operating agreement in place to set forth the structure for dealing that.if you don’t have that, and you can’t come to an agreement later, the only way toget that resolved is to fight about it with a judge, which is going to costs thousandsif not tens of thousands of dollars to fight. a buy sell agreement is a great way to savelegal fees down the road because you know

that you are going to eventually leave thebusiness. once you get it set up right, you probably won’t use an attorney for awhile. you might need an attorney when you grow anddecide to hire an employee. you might have some questions about that. if you decide toget a trademark to protect a brand name or product name. if you’re going to be utilizingindependent contracts, you’ll want an agreement to make sure that you can defend they arean actually independent contract and not an employee and set forth the terms of the arrangementprotecting your intellectual property. making sure that anything prepared by the independentcontractor is your intellectual property, not theres. the default rule is the intellectualproperty is owned by the independent contractor

who creates it, not the company that hiredthem. if you have questions feel free to give usa call. we typically go through all of this when we set up an llc or corporation for people.we typically spend an hour answering all of your questions and making sure your businessgets off to a good start and is in compliance with the law. we try to have competitive rates.we charge $450 for any business type as long as there’s one owner. and there is alsoa state filing fee which right now happens to be $155. for more information, feel freeto go to minnesotaattorney.com