First, what exactly is a corporation?
The process of registering your business as a corporation is called incorporation. Corporations are generally controlled by three different parties; shareholders, directors, and officers. The corporation is owned by the shareholders and they elect a board of directors who decide on matters of policy and management. The board elects officers who manage the business from day to day such as CEOs, CFOs. etc.
There are two main types of corporations: S-corp and C-corp. C-corps are the most popular. C-corps are taxed once at the business level, and again on dividends to shareholders who are taxed on their personal tax returns. The owner of a C-corp has the choice of organizing the company as an S-corp. For a S-corp, profits and losses pass into the personal tax return of the proprietor and are taxed at the tax rate for their personal income. S-corp and C-corp vary considerably, but taxes are the most critical factor that small businesses need to remember.
At any point in your corporate life, you can shift from C-corp to S-corp and vice versa; but preferably, you need to know the form you want for incorporation to use.
Here we will help you and provide step-by-step Instructions on how to incorporate a business
You must first ensure that you are in the clear with local business licenses and zoning authority before you are allowed to incorporate your business. Although most companies do not necessarily need licenses or permits to work, regulated sectors such as food or childcare need them. Make sure that you conform with local law so that you do not have to think about it when you start your company.
Next, decide on a business name. In order not to confuse consumers, your local secretary of state will not permit you to use the same name as another business in the area, so make sure you choose a unique name. Moreover, choosing the same name of another corporation can be a violation known as trademark infringement, and can lead to legal issues. Keep in mind that as a corp, you will have to tag a signal such as Inc., Co., or Corp. at the end of your company name.
Many secretary of state offices have an online database where you can search the name you would like for your business in order to ensure it is open for use. When the name of the business is open, several states can also permit you to complete a “reserve” form for 60 to 120 days during the duration of the incorporation process.
After choosing a business name, you will then name a registered agent. A registered agent is the person or company that will accept the mail on your behalf. When you set up a corporation, your state will require you to appoint a local registered agent to receive service of process (if the business is sued) and other official paperwork for your business. If you have a legal advisor, they will act as your registered agent as long as they have a registered office. A director, officer, or employee may also serve as registered agent if they reside in the state of incorporation. If the identified agent leaves the state, a new agent will need to be assigned.
The next step would be to Draft Articles of Incorporation. This certificate of incorporation, also known in some states as a corporate charter, is the document that must be filed with the secretary of state in order to create a corporation. The certificate contains the business’ name and address, number of shareholders, the name and address of the registered agent, and the name of the incorporator. On the secretary of state’s website you can typically find the articles of incorporation form. After drafting and reviewing your document, you will then need to file your articles of incorporation with your state. In order to do so you will need to pay the fee, which is about $100-$500. If you are struggling, contact your secretary of state’s website and follow the instructions there. There are services as well that will perform this service for businesses.
You will then write up your corporate bylaws. Your corporate bylaws is a document detailing how your organization is organized and operated. This document covers securities, voting privileges, shareholder and board meetings, how to replace board members and officials, and other information.
Additional details that can be found in the bylaws include:
- Number and form of shares the business can issue
- Details concerning shareholder meetings, board meetings, and the annual meeting of each organization
- Frequency and process for financial audits and corporate records
- Corporation’s tax and bookkeeping of the fiscal year
- Procedure to modify incorporation articles and bylaws
Usually, company bylaws are much longer and more comprehensive than Articles of Incorporation. While several states do not need you to register the bylaws, you can keep them secure in your company reports, so when you are audited, need a business loan, or choose to collect funds from investors, you can easily disclose them.
Subsequently, you will need to start a corporate records book. A corporate records book is where you store documents that indicate the status of your corporation’s compliance with IRS and corporate state rules. Here are some of the key papers to have in the company records:
- A copy of the articles of incorporation
- A copy of bylaws
- Minutes of shareholder, board, and annual meetings
- Business loan documents
- Annual reports
- Stock transactions
- Copies of company contracts
- Documentation detailing commercial real estate transactions
While it is referred to as a corporate records book, it is fine to store the documents on your computer in any format. Records should only be anywhere you can conveniently generate them if the company is audited.
Once you have all your files in order, you will be able to hold your first board meeting.
The members of the board will:
- Adopt articles of incorporation and bylaws.
- Decide the corporate seal.
- Authorize and sell equity shares to original owners (sometimes named “capitalizing a corporation”). Stock issuance is subject to complex securities regulations, so finding a securities lawyer is wise.
- Officially elect officers, including the CEO, CFO, etc.
There are several final steps that need to be completed before you can call your business a corporation. Some federal and state requirements include:
- Apply for an EIN (employer identification number). You can apply free of cost on the IRS website.
- Open a business bank account.
- Pay your tax payments. Federal corporate taxes are due on a quarterly basis, while state tax laws differ from state to state.
- Some states require businesses to send out notices for the corporation, declaring the formation of the corporation in a newspaper for a certain period of weeks.
States have specific laws to obey and retain the corporate status. You typically have to submit an annual charge or send an annual report. Remember to contact the IRS, the secretary of state, or your lawyer if you have any concerns about your business.
If you are an S-Corporation, there is one more additional requirement. Within 75 days of incorporating your business, you must file the IRS form S-2553-Election as a small business corporation. This will enable the election to take place that year. Know that you cannot submit this form online; either fill it out and send it in or fax it to the IRS.
- Basic business information (name, address, EIN)
- State and date of incorporation
- Shareholder information
- Business‘ fiscal year
- Date the S-corp election will take place
Many businesses that start as sole proprietorships or partnerships tend to convert as they start making more profits or need to apply for financing or a business loan. In light of the Trump tax reform, several members of limited liability companies (LLCs) intend to turn their firms to corporations. To turn from a sole proprietorship to a company, just implement the measures described above. Converting from an LLC to an organization is more difficult, since you radically alter the company’s ownership structure. Here you can get support from an attorney. Although the methods differ by state, there are three key ways to transform an LLC to a company.
- Statutory conversion (simplest) – Make all LLC members accept and file a conversion certificate with the state, along with other necessary documentation, such as LLC papers.
- Statutory merger (more complex) – Have LLC members create a new company and legally swap membership privileges for corporate stock shares. You must officially dissolve LLC.
- Non-statutory conversion (hardest) – Create a separate company and draft legal documents to swap LLC membership privileges for securities and pass LLC debts and liabilities to the corporation.
When you turn your company to a corporation, it remains the same for preservation of the corporate status. You will have to hold board sessions, retain company papers, etc.
The final step would be to choose which state to incorporate in. The best thing is to integrate anywhere your company is based, but often there is a benefit to incorporate in a more “corporate-friendly state” like Delaware, Nevada, or Wyoming.
Nevada and Wyoming do not impose federal income tax or state sales tax. Similarly, Delaware has no corporate income tax for companies founded there but doing business elsewhere, and they do not collect personal income tax on non-residents. While it might sound enticing, the important point to note here is that you cannot avoid taxation easily by incorporating in another state. For example, if the company is based in California, you will have to file to do business in California and pay California taxes even if the business is registered elsewhere. That leaves Delaware—where over 50% of publicly listed US companies are incorporated. Many company owners prefer to enter Delaware since it provides a different court structure for companies and persons, and as investors feel more relaxed investing capital into a Delaware organization. These concerns don’t really extend to small business owners who don’t want to collect investment money.
Please be advised that all of the foregoing is NOT legal or accounting advice and you should review your particular circumstances with a competent attorney and/or accountant before forming a business.
At the most basic level, credit card processing fees are the cost that a business owner pays to accept payments by credit card. There are many components that are involved which determine the total cost including transaction fees, flat fees, and incidental fees. The average credit card processing fees generally range from 1.7% to 3.5% per transaction. These fees are the price your company pays to process credit cards.
It is a crucial move for business development to accept credit cards as a means of payment. However, it can be challenging learning how to accept credit cards at your point of sale, or online and learning and understanding all the credit card fees involved. Learning about these credit card processing fees may not be the most thrilling part of running a small business. But these credit card processing fees can add up and become a significant aspect of your overall finances. We have developed this complete guide to credit card processing fees to help you make the financial decisions that make the most sense for your business. We will explain what credit card processing fees are, their average cost, and how your company will be charged by different providers to accept credit cards.
What Are Transaction Fees for Credit Card Processing?
Transaction fees are fees that you will be charged per each transaction you process with a credit card. These fees are made up of interchange rates, the assessment fee, and the payment processor markup.
Flat fees are fees that you will have to pay typically on a monthly basis for working with a gateway or merchant service provider, which is the cost for using their service.
Incidental fees are fees that you are charged for a particular occurrence such as a chargeback (voided dispute or fraudulent claim) or a non-sufficient funds (NSF).
Credit Card Processing Fees/Transaction Fees
Now that you grasp the types of fees involved with the processing of credit cards, let’s break down in terms of both expense and procedure, what each means and what you should anticipate as a business owner. Every time a customer taps, dips or swipes their card these are the parties that are involved:
Issuing bank: This is the institution that has provided a credit card to your customer.
Credit Card Network: This is usually one of four main firms, Visa , Mastercard, Discover, and American Express, while foreign purchases may include others.
Receiving Bank: This is the bank that collects the funds from the issuing bank and deposits the funds in the bank account of your organization.
Payment Processor: This is the intermediary between the collecting bank and the issuing bank. Your payment processor may be a merchant service provider or a payment gateway, based on your specific company. The processor addresses problems such as authentication of the cardholder and account conflicts.. Each transaction charge consists of the exchange rate, evaluation fee, and markup of the payment processor, and each of the aforementioned parties earns a portion of this amount that you pay as the business owner.
Interchange Rate: The exchange rate is a fee paid to the receiving bank by the issuing bank when a consumer uses their credit card. That is how the issuing bank benefits from credit card transactions. You, the merchant, are going to compensate any or more of the exchange rate directly or with an exchange refund— which may be marginally cheaper than the entire exchange rate. Usually, exchange rates or returns are measured as a percentage of the gross purchase price. Each card network decides its own prices, which differ depending on factors such as:
- The card carrier
- The type of card; debit, credit, business
- How risky the card network considers the merchant’s business and industry
- The various ways the merchant can accept credit card payment
The Assessment Fee: The exchange rate is how the issuing bank gains from utilizing a credit card. What about the card network itself, what fees do they charge? This is when the appraisal charge falls into effect. The network charges a flat price on each purchase, in addition to the interchange cost or refund. The evaluation charge plus the interchange rate or rebate is also known collectively as the interchange fee. Each network sets its interexchange fees), and is modified twice a year. The measurement model is incredibly complicated and quite obscure, but the card network uses some codes to help them calculate the danger of which any particular seller is exposed— the possibility of default or theft. The appraisal charge comes straight from the card network and is part of the total conversion fee, it is a non-negotiable fee, and would be set independent of the payment method.
Payment Processor Markup
You’ll never get out of paying all of these fees, but you can negotiate the payment processor fee, this fee is charged on top of the interchange fee. The markup depends on the specific payment provider you choose, with various pricing plans. Whatever package you want, avoid long-term contracts. This way, you can compare plans and change processors at any point, as your business grows
Payment processors typically offer their services in three packages: Tiered Plans, Interchange – Plus Plans and Flat-Rate Plans. While it might be clearer to grasp tiered plans than other arrangements, the processor itself decides which category a given sale falls under. You can never be absolutely sure which tier the purchases of your client would fall into, which in the long run can prove costly. While Interchange – Plus Plans provides more transparency for future expenses, the drawback is that your statements are more complex, and you may or may not actually end up saving. For brand-new small business owners who don’t yet have the volume required to negotiate with payment suppliers, a flat-rate contract is a smart option. Additionally, since flat rates are often focused on a proportion of the larger purchase, if the purchases are on the smaller side, the added expense will not be too expensive.
Credit Card Processing Fees
Flat rate: The processing charge is shared by many separate parties. For the whole company credit card fee, the flat rates you pay to receive credit card payments come straight from the payment processor. In other words, this fee is what you pay the processor to access the multiple aspects of their service. The exact payments differ depending on the specific payment provider, they are usually periodic on a monthly or annual basis. However it is necessary to remember that with such programs, the payment provider can also charge one-time flat rates.
Recurring Flat Fees: Based on which payment processor you use, you may need to pay a variation of the following flat fees:
Monthly or annual account fees: It is a monthly cost to hold the account open with the payment processor and to operate the processing platform.
Monthly minimum processing fee: There is a recurring minimum charge for certain payment card processing firms. You will have to compensate for the variance between how much you have incurred in processing fees and their monthly minimum if you have not met the necessary minimum sum of fees per month.
Terminal lease or rental fees: Many payment processors require or encourage you to buy or lease a credit card processing machine.
Withdrawal fee: If you transfer funds from your payment processor account into your business bank account, a processor can impose a charge.
Payment gateway provider fee: Note that you’ll likely need a payment gateway provider if you offer goods or services online. If you use this feature, you may want to compare various supplier rates.
Statement fees: A processor can charge a fee for preparing your statements, in paper or online.
IRS reporting fee: Certain payment processors charge you for reporting your transactions to the IRS and for sending you the necessary tax reporting forms. You should dispute this charge on your monthly statement. Industry standards require the processor to deliver the service free of charge.
Payment card industry (PCI) fees: PCI Data Security Standard (DSS) is a series of requirements for data storage that extends to all credit card authorizing institutions. While not federally mandated, most major card providers demand that certain requirements be adhered to for all companies associated with them and several states have enacted them into legislation. Failure to comply with PCI DSS leaves a corporation vulnerable to fines, civil proceedings, and even government investigations, but you may be paid a fee from the payment provider to offset the expense of enforcement. And the payment provider may offer help to guarantee that you are in line with PCI DSS should you incur this charge. But these are hidden costs much of the time that retailers don’t notice on their statements. Ask about it if you notice these charges on your statements.
One Time Flat Fee: Sometimes the above payments are subject to negotiation, and you could ask a payment provider to completely waive them. Some companies charge more flat rates than others but when searching for specific policies, you will want to remember this. The avoidance of these payments is also marketed by such providers as an advantage to their specific service. A couple of the flat payments you will find more often are:
Account setup fee: This may involve a technician who sets up the appropriate devices, or who offers customer service on the phone with the setup. There may be a fee for the setup of the merchant account.
Terminal purchase fee: You should buy a credit card terminal, which can be a decent investment relative to rented or leasing facilities, although you should try to negotiate.
Cancellation fee: This is a fine for early termination of the deal paid by the payment processor, and it may be expensive. Check if this charge can be forgiven by the processor, and be sure that the agreement you sign allows for such a waiver.
Incidental fees: Incidental fees are the last factor involved in the total cost of accepting credit cards for your company. These payments come straight from the payment processor, like the flat fees, which are a product of a single case, ensuring you may not face either of these fees for several months. The exact fee will differ from processor to processor. Here are some of the more typical incidental fees:
Card holder dispute fees: The processor might charge a fee for each time a customer disputes a charge.
Chargeback fees: If the customer conflict ends in a chargeback, which results in a credit to the cardholder, you will be required to pay a fee.
Non-sufficient funds fee (NSF): They will charge you an extra fee if you do not have sufficient funds in your business banking account to pay your payment processor.
Batch payment processing fee: Each time your company submits a batch of payment card payments, perhaps as much as once or twice a day, your processor can charge a fee.
In general, we simply worry about purchase costs while talking about average credit card fees, and not generally flat fees or incidental fees. As a company owner, the biggest challenge is calculating how much you are paying with each purchase, because this payment derives straight from the sales. The cost of processing credit cards usually falls between 1.7% and 3.5%. Of course, this number depends on the considerations we listed before, such as how the purchase is made, the market, the card form, etc.
Payment Service Provider vs Merchant Account
There are various payment processors, each with different characteristics, resources and rates. PSP (payment service providers) have been trying to simplify credit card processing transaction costs by offering flat prices for each transaction of the same nature and avoiding lengthy contracts and secret fees. You don’t have to buy pricey business computing machines to use a PSP, nor do you need to sign a long-term deal or think about undisclosed costs. While these services might have easy-to-grasp price models, they may not always be cheaper than conventional merchant account providers.
For card-presented purchases, card-not-present payments and internet payments, PSPs charge an annual fee. For example, if you accept a credit card in your retail store, you can incur a lower price. If a consumer wishes to buy electronically on the website, even if you use payment information that is saved on a register, you pay a higher price. In general, payment processing providers have improved security from chargebacks relative to commercial processors.
Credit card payment costs, as you will see, can be a bit complicated and challenging to understand. However, breaking down all the multiple elements adding to the total expense and how payment processors arrange their prices will help you overcome this. In the end, the processing of credit card payments can be important (but necessary) costs for your company, so the most important thing is to consider what types of fees you will be facing so that you are willing to budget your finances appropriately. Selecting the right payment processor will make a big difference in the reduction of credit card charges. You may want to use the particulars of your market-business, revenue amount, payment acceptability, etc.-to decide which payment processing provider or merchant services fit better for you. In order to ensure that you have a good deal, you should pay particular attention to the features and facilities provided by any provider of flat or incidental fees and to discuss your costs wherever possible. Companies like Square and PayPal have generally simplified the expense of issuing credit cards dramatically and have rendered conventional account processors inefficient. This ensures that your credit card processing costs are more manageable and simpler to understand.
As a small business owner, you already have more than enough on your plate. Handling all the moving parts to get your business off the ground is already more than a full time job. But if you let certain things slip through the cracks, you could pay a steep price for it later. Payroll is one of those important functions that can not be overlooked as you get started.
Establishing a payroll system on your own can be confusing, but the basic steps are laid out below. Every small business is different, and so each business’s payroll needs will be slightly different. Be sure to consult with a professional who is familiar with the details of your company to ensure you are properly set up. This will save you many headaches later down the line.
The first place to look is the US Department of Labor website. Make sure you are viewing the laws implemented in your specific state. There are a variety of local and state laws that come into play that must be followed to avoid fines and penalties. These include:
- Minimum Wages and Hours
- Workplace Safety and Health
- Equal Opportunity
- Employee Benefit Security
- Family and Medical Leave
The next step is to set up your payroll schedule. Many businesses have weekly, biweekly, or semi-monthly payroll procedures. For your payroll, decide what schedule works best for your company, keeping in mind that some states impose a minimum payroll schedule frequency. When deciding how much you want to pay your workers, keep cash-flow in mind–beyond the money you must pay your workers, you will also need money to run the business. There are strict laws on paying workers on time, and while the payroll schedule can be adjusted, you should not do it too often. Constantly changing payroll schedules can disrupt your cash flow.
Once you have established your payroll schedule, the next step is to establish policies for your employees. The easiest way to do this is with an employee handbook. This will ensure that everything between you and your employees is as clear as possible. You should have an attorney who specializes in employment law in your state to review or write your handbook. If you are struggling with where to begin there are a number of resources available online that can help you assemble an employee handbook.
The next step is to to Apply for Your Federal Employer Identification Number (FEIN or EIN)
For tax reporting purposes, many sole proprietors use their Social Security number. However, it is best to use a federal employer identification number, or FEIN or EIN, for employment purposes, this is also known as your tax ID number. Your EIN is the number you will use on all business tax filings and forms once obtained. For this reason, as soon as they start their companies, many accounting professionals strongly urge business owners to get an EIN. If you don’t already have one, it’s easy to obtain an EIN. Simply go to the IRS website, and you can apply online and get your EIN immediately.
Before you leave the IRS website you should download Publication 15, it contains all the information you will need to know in order to comply with federal withholding and reporting requirements. These laws on withholding and unemployment insurance accounts can vary from state to state, so make sure you are viewing your state laws. There are many websites where you can find information pertaining to your employment situation for your tax commissions and unemployment security commission. However, these websites can be difficult to navigate, so it is best to consult with your accountant or employment lawyer regarding the laws pertaining to your state.
Next you would like to enter your payroll schedule and tax filing due dates into your work calendar. When organizing your calendar, keep in mind that state deadlines might differ from federal due dates, make sure you inserted all the important deadlines correctly into your calendar, and that you applied for your FEIN, state withholding, and unemployment insurance accounts.
Following you will decide on who will administer your payroll. Some businesses choose to handle their payroll in house while others use a service provider. There are advantages and disadvantages to both choices.
In house payroll gives you a little more leeway when it comes to processing your payroll. When working with a payroll service provider they typically demand lead time of three to five days, if payroll information is not submitted by its deadline a rush fee will be charged. Payroll service providers also take full responsibility for the timely reporting of tax payments and returns, this typically appeals to busy owners of small businesses.
In choosing to proceed with a payroll service you may be thinking “well that was a waste of time”, most payroll software programs ensure that all these steps get done and go smoothly. However, in our experience, where the company owner has no input in the process, payroll for small companies, is at times set up incorrectly. Working closely with a payroll service provider by using payroll software will streamline the ongoing payroll process, but knowing the standards and laws as they pertain to your employees is still crucial for you.
At PMF we work with ADP (Automatic Data Processing) to help provide you with best payroll software that will help enhance the efficiency in your business payroll system.
And finally, now that you have your payroll set up in place it is time to hire your first employee. After hiring the perfectly suited candidate for your business, collect their information in order to have them properly set up in your system.
It is a big move for your small company to set up a payroll for your first workers. This achievement means that your company is one step closer to operating independently. Employees enable small business owners and their businesses to grow, rather than relying on themselves to do all the work. This allows the business owner to really build the company, and focus on the growth of his business. The payroll system of a small business can do the same: take busy work off the hands of a small business owner so that they can strategize and expand their organization.
Once you’ve completed this thorough payroll setup you can move forward with growing your business with full confidence that your payroll will be properly taken care of.
Forms of Business Taxes
There are generally 3 levels of taxes your business must pay: federal, state, and local. Federal taxes apply to any business in the United States, whereas state and local taxes will vary based on the laws where your business operates. Regardless of what level the taxes are coming from, there will generally be 6 types of taxes you may be subject to: Income tax, which is tax you pay on the income earned by the business; Self-employment tax, which you pay if you are a self-employed business owner; Employment tax, which is also called Payroll tax, is the tax that you deduct from your employees paychecks that goes to things like social security and Medicare; Excise taxes, which are taxes for operating in specific types of goods or services, like airlines; Sales tax, which is the state level tax that you must collect from customers when they purchase goods and services; and property tax, which you pay for any property that your business owns.
Small Business Taxes Based on Entity Structure
Depending on the way you structure your business entity, you will pay your taxes differently. We break them down below:
A corporation owned and run by one individual is known as a sole proprietorship. For the owner of a sole proprietorship, filing taxes is reasonably simple.
As the single owner you can record corporate gains and expenses on your own income tax return instead of reporting your small business taxes on behalf of the company. Your business profits will be taxed as personal income at your normal personal income tax rate. Sole proprietors also pay self-employment taxes, which account for the owners Medicare and Social Security contributions. If you are a sole proprietor, you will file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes. These estimated taxes will account for any additional medicare and social security obligations you may have.
Partnerships are companies owned and run by two or more owners. There are several kinds of Partnerships that you can form, including General, Limited, and Limited Liability. Each have slightly different characteristics so you can choose the form that works best for your venture. . Company owners who are part of the Partnership must pay income taxes, self-employment taxes and quarterly estimated taxes, similar to the sole proprietorship.
Partnerships must file Form 1065, which is an annual report covering the details of the company’s revenue, deductions, gains, and losses, however, Partnerships does not pay any income tax as an entity. Partnerships are subject to “pass-through taxation” so the owners are taxed personally for the profits of the partnership. Therefore, in order to file small business taxes, owners of the partnership file their shares of income and losses on their personal tax returns. These amounts will be shown on a Schedule K-1 form.
If you operate a C-Corp, your company is a legally separate entity from you as the owner. C-corps are subject to what is referred to as “double taxation” the company is taxed for its profits and then when those profits are passed to the shareholders, those profits are taxed as income to the shareholder. Besides profits, other amounts are subject to taxation as well. For example employee salaries are taxed to cover social security and Medicare, and corporate dividends are taxed at a dividend-specific rate. Sometimes the owner can take a slightly lower salary and receive higher dividends to make up for it, though you should be careful with such a strategy, as the IRS requires your salary to be at least reasonable for your position.
S-Corporations are similar to C-corps in that they are legally separate entities from its shareholders. However, S-corps are taxed as pass-through entities, which allows them to avoid double-taxation. Each shareholder reports their share of the company’s profits and losses on their own tax returns and are taxed at regular personal income rates. The S-corp still has filing obligations to account for its financial state, but they do not actually pay anything along with that filing. As with C-corps, the shareholders and employees can strategically structure their profits and income in order to maximize tax benefits, within reason and subject to the regulations of the IRS.
Limited Liability Company (LLC)
LLC’s are a sort of hybrid between all of the entity structures already discussed. LLCs give their owners legal separation from the company, while also being subject to pass-through taxation like a sole proprietorship or S-corp.
When to pay
If you expect to owe more than $1,000 in income taxes for the year, you will have to pay quarterly estimated taxes, no matter what kind of entity you run. For a corporation, this threshold is lower–$500. While individuals pay taxes once a year, businesses must do so quarterly–4 times per year. This means paying more often, but also paying less each time you have to pay.
On top of that, if your business has employees, there are further obligations you must stay on top of. You must deposit federal income tax that is withheld in your employees’ paychecks, unemployment taxes, and social security and Medicare taxes on behalf of the employer and the employee. You can make these deposits on semi-weekly or monthly intervals.
Quarterly Estimated Small Business Taxes
To estimate your quarterly business tax payments, you will need to calculate four things: expected adjusted gross income; taxable income; deductions; and small business tax credits for the year. The easiest way to do this is to refer to your taxes from last year. If this is your first year filing for your business it is a good idea to seek out a tax professional to guide you through this process. After you have compiled these numbers, you simply fill out the IRS Form 1040-ES Estimated Tax Worksheet and file your taxes quarterly.
Depositing Small Business Taxes
As discussed, the various federal taxes you withhold to account for social security, medicare, and unemployment must be deposited regularly to the Government. When you do so, you must also fill out some tax forms including: Form 941 for federal income tax, social security, and Medicare; Form 944, if your employment taxes will not exceed $1,000 for the calendar year; and Form 940 for unemployment tax obligations.
The schedule of your deposits will be determined by your total tax liability indicated on your Form 941. You will deposit monthly if you report under $50,000 during the previous period, and semiweekly if you report over $50,000 during the previous period. Monthly deposits are due on the 15th of the month, whereas semiweekly deposits are due on Wednesdays and Fridays. You can make these deposits electronically through the federal government’s electronic filing system.
Preparing Your Business Tax Returns
If you take the time throughout the year to organize and prepare for your reporting deadlines you can save yourself a lot of time and stress once filing deadlines come around. If you are trying to pull things together a few days before the tax deadline, you are bound to make some mistakes and forget to include some things. Below is a list of documents that you will need in order to file your small business tax returns:
- Accounting documents
- Bank and credit card statements
- Depreciation schedules
- Partnership agreements
- Payroll documents
- Previous year’s tax returns
In addition, you should keep the following documents on record as they will help account for all of the income and expenses of the business. .
- Advertising costs
- Contractor payments
- Checking and savings account interest
- Employee salaries
- Gross receipts
- Insurance premiums
- Office rent (or portion of the rent or mortgage paid on your home)
- Office supplies and equipment
- Phones and other communication devices
- Professional fees
- Returns and allowances
- Sales records
- Transportation and travel expenses
- Unclassified income
Business Tax Deductions and Credits
Based on your business structure, you are entitled to subtract “ordinary and necessary” costs that your business incurs from simply operating. If you can show that the deduction is relevant, you can subtract the deduction from the taxable profits. Essentially, deducting expenses allows you to lower your income, and thus owe less taxes . On top of that, you may be eligible for tax credits as well. Credits are even more advantageous than deductions because the credit applies directly to the taxes you owe, rather than just reducing the taxable income. Not all deductions and credits will be applicable to your business, but it is worth familiarizing yourself with all of them so you don’t miss out on opportunities to reduce the amount of taxes you owe in the future.
Common Tax Deductions
The most common tax deductions you should be aware of are: Vehicle Expenses, such as a van or truck used for the business; Insurance, such as health and malpractice insurance; and Rent, including traditional real estate rent but also rent for equipment and machinery. Other common deductions include startup costs, inventory, and loan interest. Be sure to thoroughly research how these deductions work and consult a tax professional if necessary in order to protect yourself from and avoid an audit.
How to File Your Business Taxes
There are two ways to file your taxes: online or mail. Generally speaking, it is easier to file online, and may be required in some cases. But if you go the traditional mail route, be sure to carefully follow the instructions on the forms, they can be a bit tricky if you are doing it for the first time by yourself.
Business Taxes Accountant
Plenty of business owners undertake their taxes on their own, but there’s also no shame in seeking professional help. Hiring an accountant to help manage your finances can ensure they are handled properly as well as save the business owner a lot of time and energy. Bringing in an experienced accountant can make a huge difference in your company’s finances. They can provide you guidance and strategies to most efficiently run your business and take advantage of all of the benefits and loopholes that are scattered throughout the tax code that you may not have the time to find yourself.
Getting ready for tax season is a yearlong endeavor. Preparing in advance and staying on top of your obligations will save you a lot of time and hassle in the process. Remember to have systems in place to keep tax-relevant documents organized and safe. Keep an eye on deadlines and have a plan for getting everything filed and paid on time. The more robust your planning is, the less you will have to actually do when it comes time to file. Lastly, do not be afraid to seek the advice of a tax professional. You may be leaving money on the table if you try to handle taxes yourself without the proper experience. You may not be thrilled about paying an account to handle your taxes, but you could save yourself far more on the backend by doing so.
Managing a business can be very overwhelming, especially if you have limited experience in the private sector, or have not gotten an MBA. This guide will help you comprehend the main steps of managing and operating your small business.
Steps to managing the finances of a small business
- You Should Have Separate Accounts for your Business and Personal Finances
There are two important advantages to separating your business and personal finances. First, filing taxes is significantly simpler when everything is separate. Otherwise when it comes time to file taxes you will have to go line by line through your expenses for the year and categorize every line. This can be extremely time consuming and it is not always so easy to remember every single personal and business expense over the course of a year. The second is Legal. By keeping your finances separate, your personal finances will be protected from any liability or legal issues that arise in connection with the business.
- Open a Business Bank Account
Setting up a Business Bank Account is the easiest and most common way to separate your finances. There are several factors you should be aware of as you choose which bank to work with. You should understand the difference between a checking and a savings account, and whether you need just one or both. Learn about the fees that you will be subject to and how to avoid them. Factors like wiring allowances, ATM availability, Mobile or online banking apps should be kept in mind as well. It is important to research multiple options before making a decision to get the best banking solution for you and your business.
- Get a Business Credit Card
Having a separate credit card will help you keep your business purchases separate from your personal and build your business credit. There are various different business credit cards available, review the benefits and fees that come with the card and make sure you choose one that is best for you and your business.
- Business Accounting
In order to manage the financials of your business it is important to understand the basics of small business accounting. A good place to start is the terminology, such as gross revenue, expenses, net profit, cash flow, and more. If necessary you should consult a professional to learn how your accounting impacts your business finances. It may be easiest to use an accounting software program to start or you may find it beneficial to hire an accountant, especially in the early stages of your business.
- Keep Your Documents Organized
Keeping documents organized will help you run your business more efficiently. It will allow for your accountant to easily file your business taxes, apply for business financing, and enable you to follow your company’s revenue, expenses and profit. The four main documents that every small business should be familiar with are a balance sheet, income statement, cash flow statement and revenue forecast. There are multiple software programs you can use to organize and keep track and file your business documents.
- Pay Business Taxes
Calculating your business taxes can be a daunting undertaking, but properly paying them is one of the most crucial things you need to do as a business owner. Failure to do so can result in fines and penalties, all the way up to losing your business or facing criminal charges.
This is what you need to know about filing your business taxes: You will first need to obtain a federal tax identification number. This is known and referred to as EIN (employer identification number). This number is what the IRS uses to keep track of your business. It is also important to understand your federal business taxes. Depending on the entity, type of business you operate, and revenue you bring in that will determine your tax responsibilities. Taxes that fall under the federal business taxes are; income tax, self-employment tax, estimated tax, and excise tax. Additionally most states require additional state taxes, which will require you to pay income and employment taxes for your business. You should consult with a tax professional before you start operating your business to ensure that you are fully aware of all the different taxes you will be subject to and when and how to pay them.
- Managing Your Credit Score
Almost all companies at some point require good credit to qualify for things like business credit cards and financing, as well as some one-off investments like equipment, property, or inventory. In order to maintain your credit score it is important to follow these steps:
- Pay bills on time
- Avoid loan defaults, bankruptcy, judgments, collections, foreclosures, and other actions that will lead to negative marks on your credit
- Use your credit cards wisely, keep your balance under 30% of your limit, lower if you can, and definitely do not max it out
- Monitor credit reports regularly and notify the credit bureaus if you see anything that you do not recognize
- Managing Your Business Credit Score
As a business owner, on top of having a solid personal credit score, you will also want to establish and maintain a good business credit score. Once obtaining an EIN, you will be able to establish a business credit score, which will show lenders and other potential creditors that your business can responsibly handle its debt and overall finances. If you already have a bad credit score and want to improve it, Premium Merchant Funding offers credit counseling services by experienced credit repair analysts who can help you develop a plan to improve your business credit score.
- Understand Your Business Loan and Financing Options
Based on the type of loan you are looking for and the lender you apply with, there will be slightly different requirements, but generally they include fundamental financial metrics of your company, like credit score and revenue. Since the 2008 financial crisis, lending options from traditional banks have been harder to get, but are still available to companies with great financial metrics.
Regardless of your background or experience, business finances are one of the more stressful aspects of running a business. Keep in mind that you can learn as you go, and you do not have to be an expert from day one. As long as you follow the tips we have given here, and are not afraid to consult an expert when you are unsure, you will be well on your way to success!
What is ADP?
ADP Payroll is a cloud-based payroll framework that helps you to handle payroll, HR, recruiting, and benefits. For small companies, they sell two plans: ADP Run, a four-tiered package tailored for up to 49 employees, and ADP Workforces Now human capital management (HCM) software for businesses with 50 or more employees. Pricing differs by package, but ADP provides two free months of service to new customers.
You might be asking yourself, why would you need ADP, you can process payroll yourself?
As a small business owner, accounting can be a daunting challenge. There are hours to calculate, taxes to deduct, and laws and regulations that must be complied with. Plus, if you make a mistake, you could find yourself paying a hefty fine.
And for those reasons, it now makes a lot of sense to find a reliable small business payroll service provider to support you handle the payroll. Payroll software is capable of automating all of the payroll tasks required, including estimating salaries, withholding taxes, and depositing wages into the bank accounts of the workers.
If you are in the market for payroll software you have likely come across Automated Data Processing (ADP). It is one of the oldest, best known payroll softwares available. Starting out in 1949, as a manual payroll processing company. There are now over 860,000 businesses in a140 countries that rely on ADP’s payroll software to distribute payroll to their employees.
So how does ADP work?
ADP Payroll is cloud-hosted, ensuring it can be accessed from anywhere and does not need any applications to be enabled or managed. You will be required to connect the ADP website to your account after you sign up for ADP’s Payroll and pick your schedule. You will then be led to the Business Setup Wizard. You can now have your simple business details here, manage your payroll schedule, insert tax, wages, rewards, deductions, and salary information for jobs, and link your business bank account to the software.
The next step is entering your employees’ profile into the system which must contain: their legal name, date of employment, social security number, birthday, gender, and contact details. Next, you will also insert their pay scale (hourly or salary) and the forms and percentages of wages and deductions. You must also obtain their bank name, transaction form (savings or checking), and account and routing number if the worker opts for direct deposit. Last, for tax purposes, the employee’s withholding status (gathered from their W-2), allowances, and exemptions must be entered. When all this data is entered, you will be able to continue onto payroll processing. Log into your account dashboard when the next pay cycle begins and select the “Run Payroll” option. You will be able to view your employees timesheets from here and make any manual corrections as necessary. The salary of each employee could generally be calculated on the details in their profile.The app also estimates deductions for products such as income, health care, and employer payments. Click “Approve” to operate the payroll if everything looks good.
Three payment delivery options are offered by ADP Payroll. Employees can request a direct deposit at the end of each pay cycle to collect their funds. ADP can print and send the checks to the office if workers want to be paid by paper check, so they can be delivered on payday. Lastly, if desired employees may choose to have their funds transferred into a prepaid Visa debit card.
ADP’s Payroll Features
Most payroll software companies contain everything discussed here. So what separates ADP from other payroll companies? ADP comes with a selection of extra functionality that can assist you in handling payroll, remaining compliant with applicable laws, and maintaining your books.
ADP Payroll would automatically fill out and submit the necessary paperwork along with the estimate of the proper withholdings and make the required payments to city, state and federal entities. ADP can also handle any tax issues related to the payroll taxes of the company. ADP can supply W-2 and 1099 documents to the staff by the end of the year.
ADP Payroll integrates with QuickBooks and most major accounting software.
Hiring New Employees
ADP can fill out and file all the new recruit documents once you develop a new job profile, and send it to the relevant state and federal agencies.
Reports on Payroll
ADP Payroll provides robust functionality for monitoring. Reports on payroll summaries, earnings records, timecard comparisons, retirement payments and more can be created from the dashboard. You may also sort these files by date range or by employee, and export them to Excel for more customization.
The more sophisticated programs include security functions, including registration in the Labor Law Poster Compliance Update Program of ADP and assistance with wage garnishment. ADP will also administer unemployment benefits for your jurisdiction, including auditing the premiums to guarantee that you receive the best offer available.
Services for HR
ADP is a Professional Employer Organization (PEO), which ensures that it does far more than merely payroll services. If you opt to use ADP for payroll, you can also activate any of those other functions, based on the package you choose.
All Payroll users have access to human resource software, including a library of key government documents and information, advice on how to strengthen your HR procedures, support in choosing employee health insurance and designing a retirement package, and details to help you keep on track of improvements in the Affordable Care Act.
Depending on how advanced your plan is you may also receive access to ZipRecruiter, an employee handbook wizard, onboarding services, and links to an online library of HR forms, best practice manuals, and enforcement details if you subscribe to a more comprehensive package. You will also be given access to do up to five background checks yearly, and get one-on-one support from the HR team at ADP.
ADP’s time and attendance log is another ADP function that payroll customers have access to. For quicker processing, this method syncs directly with the payroll functions. Employees can clock in and out with a smartphone application with ADP’s time and attendance service, request PTO, and report overtime. The method may be used by employers to monitor the PTO, authorize timetables, and build schedules.
ADP provides assistance on a 24/7 basis by phone and email for both employers and employees. On the platform, there are also help pages that address a large variety of different questions relating to payroll, HR, and other subjects
ADP Mobile App
All the above functions, including payroll management, time monitoring, and HR software, can also be accessed through the ADP mobile app.
A Review of ADP’s Plans
For small enterprises, ADP provides two separate payroll products: one package for firms of up to 49 workers and another for 50 to 1,000 employees. Once the company expands, ADP offers two additional enterprise solutions: ADP Mega HCM is designed for organizations with more than 1,000 employees, and ADP Streamline is designed for multinational corporations.
- ADP Run
There are four plans inside ADP Run, each having a different collection of functions and capabilities. For companies employing up to 49 employees, ADP Run is the route to go with. The Enhanced Plan is the most popular plan. All the features from Essential Plan (lower level package) are included in the Enhanced Plan, which includes the main payroll processing features, tax filing, withholdings, and filings. You can also receive access to a check delivery option, access to reporting features, integration choices, new-hire reporting software, regular delivery of W-2 and 1099 documents, and account access to display your employees paychecks and updated tax records. HR advice, access to essential government documents and data, and support with job benefits, employment programs, and welfare are other advantages. In addition The Enhance Plan includes more payment delivery options, you will receive assistance with state unemployment insurance, and garnish payment service. You will also receive access to secure check signing, ZipRecruiter, background checks and ADP’s Labor Law Poster Compliance Update Service.
- Workforce Now
This package supports larger businesses, employing 50+ employees. Hiring Advantage is the most sought after package, which includes all the benefits from the lower level packages (Payroll Essential and HR Plus). This package includes the payroll processing features, tax filing, HR tools, features tools for hiring and onboarding new employees, digital records keeping and keeps track of employee performance. There are options to add-on other benefits that are able to be added to the package such as workforce management, HR assistance, benefits administration and enhanced analytics.
Pricing of ADP Payrolls
ADP customizes their pricing and focuses on the needs of each particular consumer. The pricing is influenced by the business need and personal package selected. In addition there is a base fee charge and a fee per-employee each time a payroll run is done. Keep in mind that ADP offers two free months of service to new clients.
Pros of ADP Payroll
Being that ADP is such a large company with a large number of clients servicing an estimated 1 in every 6 people in the workforce. ADP has built up robust features that set them apart from all other rivals. It is very likely that ADP will have everything you need to handle accounting, HR, recruiting, and benefits. In addition, they are ready to grow with your business and they give you the ability to mix and match products to be closely tailored to your company’s needs.
Is ADP Payroll the best option for your company?
ADP is versatile enough to adapt its services to suit the specifications of every business, and has the ability to support the company throughout their growth. However, it is important to do your research, as there may be better alternatives on the market if you are only searching for a basic and simple payroll solution.
Requirements to Open a Business Bank Account
It is important for the growth of your business to open a business bank account. Getting a corporate bank account makes you appear trustworthy to your investors, holds your organization and personal funds apart, and when the time comes, will help you apply for loans. The conditions for opening a business bank account will differ, as you may have expected, depending on the sort of business you have the type of bank account you choose to establish, and which bank you use. Let’s see some of the basic stuff that you will need to open a business bank account.
Benefits of opening a bank account for your business
The main reason to open a business bank account would be in order to keep your personal and business financials separate. Mixing the two accounts will make it more complicated to pay your taxes and keep the books. If you combine corporate and personal money, you may also subject yourself to further legal scrutiny. Whether you operate a corporation or limited liability company (LLC), if you do not keep your financial accounts separate you may risk the possibility of becoming personally liable for corporate losses. That means if your organization acquires a loan, creditors could come after your personal belongings. In addition, in front of consumers, a company checking account helps you appear more legitimate. You will also receive personalized business checks, a dedicated company debit card. Opening a business bank account is also one step to building the company’s business credit, something that will help you apply down the road for support and favorable supplier terms. When you start a company bank account, the rewards you get well outweigh the headaches, and you will be glad you did.
Types of accounts for Business Banking
Now that you realize the advantages of opening a business bank account, it is time to consider what sort of checking account you require. There are three major kinds of bank accounts for business:
- Business checking account
- Business savings account
- Merchant services account
Think of how your personal accounts are used by you. You use regular cost verification, and accept contributions from friends and others. To hold your extra cash, you use investments, and accrue a little interest on the capital you do not really have to access fast. Business bank accounts operate in exactly the same manner. First you would actually need a business bank account that helps you do the basics: pay for stuff, receive invoices, and control your cash flow. Then once you have an accumulated amount of excess funds (that you do not need access to for your monthly expenses) you can deposit it into a business investment account, and build interest on it. This account helps you to maintain funds while generating interest over the long run.
If your company accepts credit cards payments, merchant accounts are compensated before the consumer pays their credit card bill for their purchases. In order to open a merchant account you will need to have a business checking account. You will need a merchant account so that your company can accept the credit card purchases, and have a place to deposit the funds. Before the buyer pays their credit card firm, retailer service companies reimburse you for the transactions. Traditional banks do offer merchant service accounts but there are various banks that offer different types of accounts.
What You Need to Open a Business Bank Account
Social security number (SSN) or Employer identification number (EIN): You would need to include your EIN, as well as the documentation that the IRS sent you while issuing your EIN, to prove the identification of your organization. Some banks encourage sole proprietors to use a social security number instead of an EIN, but even if it is not necessary, there are many advantages of having an EIN. Applying for an EIN for your organization on the website of the IRS is easy and convenient. It makes a tax profile for your corporation separate from your social security number. You must have a legitimate Social Security number to receive an EIN to be enrolled on behalf of a corporation based in the United States. An EIN online request should take around a half-hour, once it is in order, make sure to save the confirmation letter of your EIN, which you will need to display to the bank.
Personal Identification: In order to show that you are affiliated with the firm, most banks may often ask you for one or two types of personal identification. You must be an officer or the company’s owner in order to establish a business bank account. A driver’s license, state-issued id, or passport provide legitimate means of personal identification.
Business License: A business license is a document provided by a state department where it is appropriate to register some kinds of business organizations. It verifies that the state is legally licensed with a corporate agency and is allowed to do business there. The procedures for securing a business license for each state or locality can vary from state to state, so it is wise to check with the bank to see what they require.
Fictitious Names/”Doing Business As”: Many firms work under a trade name which is separate from their legal name. If you find that this applies to your business, you would need to register with the Secretary of State of your state a fictitious business name, often known as a “doing business as” name (DBA). As evidence of your business’s trading mark, the bank will inquire for a copy of your DBA filing papers.
Partnership Agreement: A partnership agreement is a contract entered into by partners when they create a business, that dictates how the business will operate. This might be labeled bylaws for corporations, and for LLCs, it could be called an operating arrangement. The contract addresses pressing matters that the corporation will encounter, the privileges and obligations of each owner, and how it will do business.
Accurate Documentation: The criteria for assembling records differ slightly by jurisdiction, but they set out a few main components of your business at its core: corporate name, address, shareholders, registered agent , management configuration (who will be responsible for operating the company), and the operations with which it will be active in. The articles of incorporation are considered the key organizational text for a company, and is called the articles of association for an LLC. These cornerstone papers should be kept in a secure location and ready to be shown to a bank.
Monthly Credit Card Revenue: This final piece of info is for companies who are applying for a merchant services account. If you have a merchant account, you would need to inform them of your processing history and your total amount of monthly credit card revenue. However, if you are a startup, you most probably will not have any processing history, but will need to provide estimates of your monthly credit card income. Any merchant account suppliers, such as accounting statements and bank account statements, call for extra documents as well.
-Social security number (okay for sole proprietorships only) or EIN
-Business license with the name of the business and the owner’s name(s)
-Certificate of assumed name/DBA
-Monthly credit card revenue (for merchant accounts)
-Certificate of assumed name/DBA
-Partnership agreement with the name of the business and its partners
-Organizing document filed with the state (for limited partnerships or limited liability partnerships)
-Monthly credit card revenue (for merchant accounts)
Limited Liability Companies
-Certificate of assumed name/DBA
-LLC operating agreement with the name of the business and its partners
-Articles of organization
-Monthly credit card revenue (for merchant accounts)
-Certificate of assumed name/DBA
-Articles of incorporation
-Monthly credit card revenue (for merchant accounts)
As complicated as opening a business bank account for your business might be, it is the kind of process that you only have to experience once. Meet all the criteria for registration in your state, and have all the state and federal documents ready to go. You should also understand what the requirements of your business are, such as, if you need a checking account’s flexibility compared to a savings account’s interest rate.
The documentation needed to have your company set up with a bank account is not insignificant, but much of it will have been completed in the process of setting up your business. And later on, whether it is at tax time or as the company expands, the process of assembling these documents will come in handy.
A limited liability company (LLC) is a generally newer entity type, which is a combination of a corporation and a partnership. Forming an LLC legally separates the business entity from the owner(s), and ensures that liability for financial and legal issues of the business do not fall to the owner. By default, LLC’s are treated as “pass-through” entities, meaning that the taxes attributed to the LLC are paid by the owners directly, rather than by the corporation itself. If it elects to, an LLC can be taxed directly like a corporation. If the LLC opts to be taxed like a corporation, it could run into a Double Taxation situation, in which the corporation pays taxes on profits and then the owners share of dividends are further taxed as personal income.
What are the Benefits of Forming an LLC?
When determining whether or not to form an LLC, you must weigh many factors, including your requirements and specifications and your business goals. Here are some things to consider when forming an LLC:
LLC’s establish a partition between the shareholders and their businesses. This ensures the proprietor would not be sued individually if his business takes on liability, just the business. Furthermore, whenever the corporation is in debt the personal properties of the members of a limited liability company are not at risk. There are some exceptions where a court “pierces the veil” and holds owners individually accountable for liabilities of the business, but you can generally avoid that risk, as long as the company’s finances and the owner’s personal finances do not become intermingled.
Simpler Than Corporations:
One explanation why LLC’s are preferred by smaller businesses is because it requires less paperwork to get started. In comparison to Corporations, LLC’s are not subject to the laws which involve shareholder or director meetings.
As discussed above, by default, the LLC does not pay taxes itself, LLC’s are taxed as a pass through entity. Instead each owner’s personal income tax return records the revenue and expenses of the company. This arrangement helps the business avoid double taxation.
In many cases there are not many restrictive rules that apply to owning and managing an LLC. There are different management structures that can be used, depending on who the owners seek to entrust to run the business. LLC’s can be managed by a member who owns part of the organization, or managed by an outside manager hired for that purpose. There is no limit to the amount of owners of an LLC. Owners can include both individuals and corporate entities, both foreign and domestic.
Downsides of Forming an LLC
There are some disadvantages of creating an LLC, including profit sharing rules that may not be ideal for your situation. Additionally, if you plan on going public or seeking new investors there are some limitations.
Equity Compensation Benefits are more difficult:
Many corporations offer compensation in the form of equity. In an LLC, this can be done through profits interest, which is similar, but does not actually convey any actual ownership in the company itself. This can be a disadvantage when recruiting for an early stage business like a startup, where equity and stock options can be used strategically to recruit high level talent.
Multiple-owner LLC’s, or those taxed as corporations, will need a new EIN (Employer Identification Number) in order to file federal taxes. In order to track income, expenses, and investments, new bank accounts will be required. Although it’s not necessarily a major hurdle, it can be a big change from running a sole proprietorship out of your personal bank account.
Although the arrangement of an LLC permits for pass-through taxation, it ensures that all money is charged at the personal income tax rate of the owner. Pass-through entities can claim a 20% income tax deduction under existing tax law, which would reduce the tax bill. However, if you form the business as a C-corporation, you may end up paying less. Members must still pay tax on LLC profits even if those profits are never actually distributed to them. LLC’s are liable for property taxes, unlike corporations, and the owners of an LLC must pay self-employment taxes personally. Shareholders in a corporation can avoid some of these costs through things like dividends.
Is an LLC What You Need?
Based on the pros and cons you may have already decided whether you want to create an LLC for your business.
To summarize, if you want to protect your personal assets, choose what form you will be taxed, and a stable ownership structure, and an easily managed firm, an LLC might be ideal for your company. However if you intend to collect money from investors in order to promote the growth of your small business, you certainly would not want to become an LLC because it is not an investment-friendly structure.
Steps to Form an LLC
Forming an LLC is a pretty simple process, requiring some paperwork and fees. The process is not overly complicated, but is slightly different in each state.
- Pick a Name
There are various criteria for the name of your LLC based on the state you reside in. The names must include “limited liability company,” “LLC,” or “L.L.C.” in virtually all states. Any words, like ‘insurance’ or ‘bank,’ cannot be used with your company name until you have a permit. Additionally, the name cannot be easily mistaken with an already registered business or LLC.
- Appoint a Registered Agent
A registered agent is a person or company that receives legal mail on behalf of your company. All LLC’s in the United States must have a registered agent. Your registered agent must reside in the state of your business and over the age of 18. In many states, you can designate the Secretary of State as your registered agent, although doing so has some drawbacks.
- Acquire Company Licenses
Before you begin operations, you likely will need to acquire certain business licenses or permits. Many industries across various states require licenses and permits. If your company is in the business of buying and selling tangible, taxable goods, you will likely need to register for a seller’s permit, and properly account for sales taxes. If you are in certain regulated industries, you may also need to acquire a zoning permit before you start to operate.
- File Articles of Organization
The official start to your LLC happens when you file articles of incorporation. The articles of incorporation tell the state you are forming in what the name of your company is, the address and purpose of your company, how it will be managed and by who, and other various information. Once you file your articles and pay the required fee, you have officially formed your LLC.
- Creating an LLC Operation Agreement
Although it is typically not required to have an Operating Agreement in place to form an LLC, it is very important to the smooth functioning of your business once it is formed. Operating Agreements lay out things like ownership stakes, divisions of power, financial arrangements, including how profits and liabilities are divided, meeting rules, and decision making processes, among other things. Putting an operating agreement together should be one of the very first tasks of the LLC, as it is much easier to make these decisions before anything starts than after problems begin to arise.
Managing your LLC Business
With your company now formally an LLC, there are state provisions to preserve your business’s status. You should maintain accounting reports and minutes of all significant decisions. To maintain your company you must retain employee records and have a registered agent assigned. These requirements vary from state to state but are important to keep track of and stay up to date on.
An LLC can be a perfect option for a small business. An LLC provides you with a range of possible options for taxation and management structure, among many other things.
The term “corporate bylaws” may sound like a fancy term that only matters to big multinational companies and not your typical small business. However, every business entity that is formed as a Corporation, must adopt a set of bylaws.
Many states require corporations to create bylaws and specify how the company is operated. And while your state may not need rules, they are essential to ensuring that your company runs smoothly. This article will give you a better understanding of what bylaws are, and why they’re important for your business.
So What Exactly Are Corporate Bylaws?
Corporate bylaws are a set of legally binding rules, which the board of directors adopts upon formation of the corporation. They establish the guidelines and practices for an organization. The establishment of these rules is an essential action for the Board of Directors and allows them to properly handle the decisions and manage the functions of the business. Briefly, bylaws are the standards that govern the management and operation of a business.
Corporate bylaws will typically govern:
- Powers and responsibilities of shareholders, officers, directors, managers, and owners.
- Procedures for annual meetings
- Removal of officers and directors
- Stock issuance
- Purpose of corporation
- Business affairs
Importance of Corporate Bylaws
Corporate bylaws are a document which describes how the business is structured and operated. Bylaws are critical for both C-corporations and S-corporations.
Here are some reasons why bylaws are crucial for new businesses:
- By explicitly laying out the duties and obligations of all of the people involved in running the corporation, you can avoid disputes about who manages what and allow the company to operate easily without issues.
- As your company expands over time, bylaws are crucial to ensuring that changes will not disrupt your business. Making the decisions in advance on what happens when a partner leaves the business, how a dispute between board members will be settled, or other issues of the sort is much easier than making those decisions after they arise, and allows the company to quickly move past any disputes or issues.
- To complete certain important functions like setting up bank accounts, obtaining a loan, setting up benefits, or receiving government certifications, you will often need to provide a copy of the company’s bylaws.
Corporate bylaws are also an excellent way to delineate between business and personal matters. Many of the benefits of forming a corporation, such as limited liability, are only available if you’ve properly followed the corporate formation process, including creating bylaws.
What should be included in Bylaws
Corporate Bylaws compliment the articles of incorporation. Sometimes one is mistaken with the other. The Articles of Incorporation are a rather brief text, usually just a page, with specific details, such as the date of incorporation, the amount of issued shares, the board of directors’ names and the names of the business owners. However, business bylaws include information about how the company works on a regular basis and how particular matters are dealt with. Bylaws are meant for internal use only, whereas articles of incorporation must be filed with the state and are typically public documents. However, just because they are not required to be filed with the state doesn’t mean they aren’t useful and important. As described above, attorneys, bankers and companies you deal with may require a copy of your bylaws. Most states require companies to adopt corporate bylaws, however the standards differ, but in general what they should include is:
- Business name and address
- Legal structure
- Obligations of each member of the corporation, including how they are chosen, voting rights and the different categories of of members (voting and non voting shareholders)
- How stock is handled, including the distribution and transfer/sale process.
- Who is authorized to take action on behalf of the corporation, such as termination of a lease, or a loan on behalf of the corporation
- Organization of the board of directors, including details of how board members are chosen, qualifications, length of term and any other details pertaining to board members
- Determine the corporation’s fiscal year and accounting process.
- Provide financial audit material, particularly for companies traded publicly.
- Company record-keeping practices
- Organization of annual meetings, such as for directors, shareholders or committees. This should include the time frame of meetings, how to notify the relevant participants, and the number required to attend, and the minimum amount required to cast a vote.
- How to resolve conflicts of interest
- Provisions on how to amend company bylaws. The needs of the business can change over time, which will sometimes require amending the bylaws, so having procedure for doing so in place before the need arises will make the process smoother. .
Remember that publicly traded companies require some clauses to conform with securities legislation and exchange laws in their bylaws. Bylaws are freely accessible for traded firms in the United States, and can be found on the U.S. Securities and Exchange Commission’s EDGAR website.
How to Create Corporate Bylaws
In general, a corporation’s primary shareholders draft the rules at or immediately after the establishment of the company. At the first board meeting, the board of directors, which get elected by the shareholders, will adopt the corporate bylaws. On rare occasions, the board of directors draft and adopt the bylaws.
Generally, you can use only resources and templates to create your company’s bylaws. In certain situations, the specifications of the business may be more complicated than normal. You might have international owners, various equity groups or a vast number of business properties. If so, it might be easier for you to meet with a corporate attorney for assistance. A lawyer will help you identify what to put in the rules and the terminology to use to defend the interests of the business.
When you have written and adopted your bylaws, each member, director and officer of the company should receive a copy. These rules, after all, govern every person that is involved in your corporation. When you start up your enterprise, you can save yourself loads of effort, debate and frustration by taking the time to assemble well thought-out bylaws.
Depending on the lender you are working with and the type of financing you are applying for, the conditions for commercial funding can vary widely. We will break down the most common conditions for business loans in this guide, as well as how to qualify and apply for a small business loan.
What are the requirements for a small business loan?
Depending on the lender you are negotiating with some of the conditions you may need to follow can fluctuate extensively. For example, a loan from a bank will have different requirements than one from an online lender. However, there are also some eligibility standards for small business loans that apply in all cases. The following loan criteria may not be needed for all lenders, but in most cases, you should be prepared to show certain key metrics such as your personal credit score, annual sales, and amount of time in business.
There are 18 qualifications that you will likely need when applying for a business loan:
1. Duration of Business
Every creditor is likely to ask how long you have been operating your business. The longer you have been in business, the stronger the application is, as it indicates to an investor that the business has been profitable for the long run., It is not impossible to get a loan if your business is under two years old, but it does limit your options. While banks may be less willing to lend to companies under two years of age, online lenders may be more flexible.
2. Personal Credit Score & Business Credit Score
Your personal credit score is one of the most significant factors in applying for funding. In order to determine the chances that you can pay back your loan, lenders will ask for your personal background records and financial details. If your personal finances are solid, lenders believe this implies that you will be able to handle your company finances. Not only will your personal credit score impact whether or not you are approved, but it will also play a part in deciding the interest rate of your loan. In the end, the higher your personal credit score is the more credit opportunities you will have at your hands. If you are trying to apply for a bank or SBA loan, ideally, you would want your credit score to be 600 or above.
Your business credit score tests the creditworthiness of the organization, similar to the way your personal credit score shows your personal background as a borrower. Your business credit score is determined by your company’s history of payments to vendors and lenders. The sector, scale, and sales of your organization will also affect the metric. Most entrepreneurs are unaware that their organization has a credit score, or even that it is a basic condition for small business loans.
There are three major business credit rating organizations, and each has its own system for determining the business credit score. In addition, many lenders use the FICO SBSS score to determine your loan application, since it is focused on a mixture of the other three agencies company credit score, your personal credit score and the financials of your corporation.
Therefore, it is important to get a sense of what your company credit score looks like when applying for a small business loan. Although not all lenders check this score, for those who do, it can be a very important factor.
3. Company Annual Revenue, Profits, and Earnings
The annual revenue and profits of your business is one of the most common requirements for small business loans that you see across various lenders. Generally, lenders will want to see both a year-to-date profit and loss statement, updated within the past 60 days, and statements from the previous two years. Generally, banks would like to see that the organization is successful before it approves funding for you. Whereas, some alternative lenders will not necessarily look at long term profitability, but often require a minimum level of annual sales.
Regardless of the particular lender’s requirement, the better the business financials appear (as seen by your annual sales and profits) the more likely you are to qualify for credit and business financing at the most affordable and competitive pricing.
4. Bank Statements
In order to determine whether you can repay the loan, lenders review your bank statements. Bank statements will also provide lenders with some understanding into how well you manage the funds flowing into the business. Therefore, lenders would typically ask for business bank statements for the past three months, at a minimum, to justify your financial record claims of the firm. If you are applying for an SBA loan or traditional bank loan, you should be prepared to provide additional bank statements.
5. Personal and Business Tax Returns
Lenders may look to your business records, including taxes, in addition to your personal financial statements, to determine your capacity to afford and pay back a business loan. Typically, you would need to include your personal tax returns covering at least the last two years. If you have a pass-through entity (such as a sole proprietorship, corporation, or S-corp), where you disclose the income and expenses of your business on a personal tax return, these records would be essential. However, if you have a corporation or an LLC (that is taxed separately from you as an individual), your business tax returns would be especially relevant. Under these circumstances, the previous two years of business tax returns will be used by the lender to check your income, benefit, and expenses.
6. Loan Amount & Reason for Loan
You will need to determine the sum you would like to request for your business loan.. Banks typically have access to the most capital and can issue six and seven-figure loans. Therefore, banks would typically not be the ideal path if you are looking for a smaller loan (less than $250,000), in that case, you should shift to alternative lenders for smaller sums of funding, and in certain circumstances, SBA loans. It is important to have a strong grasp of how much money you need, as well as how you are going to use it, and of course, you do not want to apply for more than you can manage.
It might seem obvious, but lenders will want to know why you are seeking a business loan. A statement outlining how you intend to use the loan funds will be required for small business loans. Typically, lenders approve loans for an assortment of reasons, but they want to make sure that the sum of money you are seeking suits the intent of the loan.
7. Business Strategy
Often, business strategy will not be on the list of small business loan requirements, however, it is possible. For example, if applying for a conventional term loan or SBA loans, you will likely need to present a business strategy. You would have to set both your financial targets and your qualitative market goals inside your business strategy, such as potential revenue, earnings, taxes, cash flow, etc. To effectively prove to your lender that you have thought of all the possible possibilities and obstacles for your company and how you are going to develop a profitable business, you may want to use this guide.
8. Industry Type
Since each industry has a different degree of risk, the industry you are in will impact your eligibility to get a business loan. Most lenders have some sectors to which they would not lend, such as gun firms and adult entertainment companies, which could harm the reputation of the lender. Though, these restrictions will vary from lender to lender, and may even include restrictions on lending to certain states. Therefore, in order to ensure that you fulfill the industry criteria of a lender, before sending the application, you may want to consult with them on any restricted industries. It is important in your loan application to have correctly defined the industry of your company, as a minor error may prolong your application or even lead a lender to deny it erroneously. The Traditional Industrial Classification (TIC) and the North American Industry Classification System (NAICS) are two main industry coding schemes. You can find your code on the NAICS website.
9. Entity Type
A lender will want to know the corporate structure of your business.,. From the viewpoint of your investor, learning how your company is structured will give them insight into the types of risks and liabilities your company, and you personally, may be vulnerable to.u.
10. Business License and Permits
Your business license or authorization is another common business loan prerequisite. While standards for business licenses differ by state and locality, lenders will want to see your evidence of ownership and authorization to manage a corporation. This will provide the lender with confidence that they are loaning funds to a properly managed, productive organization.
11. Employer Identification Number (EIN)
While you may not require an EIN on an application for business loans (or even for your business depending on your entity type), if you have one you can include the EIN on an application. An EIN is like a corporate social security number; the IRS uses this special, nine-digit number to track the tax returns of the company. You may apply for an EIN electronically rapidly and conveniently, and again, while this number might not be needed for all firms or all loan applicants, it is nonetheless worth having one.
12. Proof of Collateral
While collateral is not necessarily needed, you may be asked to put up a fixed asset to protect your loan from a lender, such as land or machinery. If you default on your loan, the investor will take the collateral and use it to make up for any of the funds you have not repaid. Alternative lenders usually do not require collateral, however, they will still likely require some protective measures, , such as a personal assurance or blanket lien, in order to lend to your business.
13. Balance Sheet
Some lenders might want to see a balance sheet as part of their small business lending criteria, in addition to the other financial statements we have mentioned. A lender would want to use the balance sheet to see if you have adequate funds to handle the running costs of the corporation to pay back your loan on schedule and in full. Therefore, as part of the filing, you should have your year-to-date balance sheet and the past two years of balance sheets (if your business has been open that long) ready to be included in your application.
14. Copy of Your Commercial Lease
If you have a brick and mortar company, you should include a copy of your lease enclosed with a commercial loan documentation. A commercial lease shows that, regardless of what happens to the borrower, the company will be allowed to utilize the property for as long as the term of the agreement, and it also reassures the investor that you will be able to conduct business and pay back the loan.
15. Disclosure of Other Debt (Business Debt Schedule)
If your business already has other loans, and does not meet the existing loan obligations, lenders will not want to fund your business. Lenders will also measure your DSCR (debt service coverage ratio) to assess whether the business will be able to manage the loan. If the DSCR ratio is not large enough, after you have further paid off existing debt, the lender will refuse your application or ask you to reapply later.
16. Accounts Receivable Aging and Accounts Payable Aging
One of the most traditional bank loan conditions is current accounts receivable (A/R and accounts payable (A/P) aged reports. A/R and A/P aging studies inform the lender on how efficient the organization is at collecting products and services payments and paying its own bills.
The A/R summary reveals the amount of invoices you have submitted to outstanding accounts and the duration of time they are overdue. When there are many accounts shown in this report, it means the organization has not been really successful at collecting payments. However, if there are few outstanding accounts on your A/R report, it means that your methods of repayment collection are effective, you extend credit to the right kind of consumers, and your clients pay off debt efficiently in a timely manner.
The A/P report is the opposite, displaying the amount of invoices you haven’t paid by various firms. A high number of missed payments indicate that you are not efficient in managing your own expenses. Realistically you would want the A/P report to have zero overdue accounts.
17. Ownership and Affiliations
You should be prepared to reveal any ownership that you or your partners have in other companies, as well as any affiliations, such as becoming a board member or contractor in another company, when you apply for a business loan. This knowledge shows any future conflicts of interest the investor might have in the granting of the loan and any synergies the organization might have with other businesses. Having said that if the company has many members, it can be more complicated to qualify for a loan. Different lenders have differing guidelines for how many owners need a loan request to be accepted. For instance, the SBA reviews the personal financial records of someone who holds 20% or more of the corporation and allows any of these shareholders to have a personal pledge.
With this in mind, a copy of their photo ID, a resume, a personal credit score, and any personal financial documents that the investor demands would need to be submitted.
18. Legal Contracts and Agreements
Lastly, when applying for a business loan you may be requested to provide legal contracts and agreements that your company is a party to. Lenders are looking for the following:
- Contracts with major suppliers or other third parties
- Corporate bylaws
- LLC operating agreement
- Partnership agreement
- Franchise agreement
- Sales agreement, financials, and information about the business you’re purchasing (if you’re using the loan to buy another business)
- Commercial real estate purchase agreement or equipment purchase agreement (if the loan is being used for purchasing commercial real estate or equipment)
How to qualify and apply for a small business loan
While this list may appear daunting, you may not require all of these requirements for your business loan application, depending on your lender. Finally, since small business loan requirements are so subjective, before submitting an application, it is recommended to contact a lender about the process, so that you can be informed in advance to compile any paperwork or details you may need to apply, which will improve your likelihood of approval.
These are the essential measures you’ll want to undertake in order to obtain a business loan:
- Determine that a small business loan is important for you.
- Evaluate how much debt you can afford.
- Compare the options for your loan.
- Gather loan documents and paperwork.
- Submit your request for your loan.
You may want to note that banks and SBA loans will demand the most paperwork and the highest qualifications, but will also provide the most attractive rates and conditions. On the other side, alternative lenders may have faster screening procedures and more lenient qualifications, but typically their loans will have shorter terms, smaller sums, and higher interest rates. Though ultimately the specific qualifications you need to meet will vary from lender to lender, the more you know about the general framework of business loans and the application process, the better position you will be in to successfully navigate the process and receive a loan.