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Small business startups overlook financial elements of starting a business

The U.S. Census Bureau reported about 200,000 new businesses formed monthly from 2009-2019. In 2020 however, during the height of the pandemic, that number doubled to about 400,000. This was the highest increase since 2007, according to The Wall Street Journal.

If you're one of the people who have started a new business in the last 18 months, you may be overlooking some crucial financial elements of starting a business. And what you don't know, can and will hurt you at some point.

Sure, you've got business cards, a logo and a website, but one of the first things you need to do is to decide the best way to organize your business from a tax perspective in order to protect yourself. Early on in any new venture you will be entering into agreements with co-founders, investors, developers and employees.

Forming an LLC, partnership, corporation or nonprofit will protect your personal assets and may unlock tax benefits as well. But which is best for your business?

LLCs are one of the most flexible formations available to entrepreneurs. An LLC allows you to keep your business and personal assets separate.

Corporations, like an LLC, gives you liability protection and keeps your personal assets safe. However, there are different types of corporations, with different tax implications. I always meet with new business owners to get a thorough understanding of their business plan before making a recommendation.

If you are going into business with a friend or family member a partnership may be the route to go. Remember, however, partners are responsible for everything that goes on in a business, so a written partnership agreement needs to thoroughly spell out duties and responsibilities.

Companies that are going to be pursuing a social mission should form as a nonprofit. The company must be founded for a specific reason, i.e., a food pantry or homeless shelter. Some nonprofits qualify for specific tax-exempt status.

Let's move on to other key considerations for your startup. You will have startup costs, but are they deductible? The answer is yes, with some limitations.

First, no deduction is available until the business becomes active. And accumulated startups costs are limited to $5,000 and may be deducted in the tax year the business begins.

What about payroll taxes? Any businesses with employees must withhold money from its employees' paychecks and forward that money to the government for income and employment taxes.

If your business fails to do so properly, you will be hearing from the IRS. You will need to decide whose responsibility this is going to be. It can be you, or an employee you designate. Most small businesses are best off using a third-party payer, an accountant or payroll service provider.

Another important area many startups overlook is business insurance. I've seen many small businesses devested by the coronavirus pandemic because, unlike larger companies, they don't think about insurance.

Business insurance can cover a wide variety of issues, including property damage, lawsuits, loss of key employees and, especially today, loss of business income. What is the "right amount" of insurance you'll need?

Contact a professional and be sure to insure your most valuable resources. I recommend reviewing your insurance on a quarterly basis to be sure your business is properly covered.

Finally, especially important this time of year, are seven small business tax credits you should know about for your 2021 taxes. A small business tax credit is an amount of money subtracted from the taxes the business owes.

It's important to know that tax credits differ from tax deductions. For example, deductions cut a business' total tax by a percentage of the deduction, depending on the tax bracket. Alternately, tax credits reduce the tax due, not the amount of taxable income. This is a dollar for a dollar deal - every dollar of credit cuts the business tax by a whole dollar. This can be very significant and will help you recover some operating costs and save more money for your precious capital, which you need to grow your business.

These small business tax credits for 2021 include:

• Employee retention credit

• Paid leave credit

• Health care tax credit

• Work opportunity credit

• Disabled access credit

• Employer-provided child-care facilities and services

• Research and development credit

Each of these can be complex and you should talk to your accountant about how your business qualifies for them.

• Robert B. Fisher, CPA, P.C. has been providing quality, personalized financial guidance to small businesses in the north and northwest suburbs for over 30 years. His company's expertise ranges from basic tax management and accounting services to more in-depth services such as financial statements and financial planning. Fisher's Lincolnshire CPA firm can be reached at (847) 680-7505.

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