ACADEMY KINGS BLOG
Accounting Mastery Overview Of Accounting And Entity Planning With James Beltrame
Why should a business have an accountant?
Accountants can accurate financial reporting to create accurate tax returns. Accuracy is very important.
Accountants also know eal numbers for profit and loss. Are you actually making or losing money? We come across many of business owners all the time, they say: “oh, I do so well in this year…..” but by the time we look at the tax, it’s no, you really not. Therefore, if you don't know how much money that you make, how can you make a decision for yourself?
They also Verification of information for third party use
And Matching information on bank statements, financial reports and tax returns: We emphasize matching your information from your bank statements to your financial reports to your tax return because, in our experience, if your business is ever audited, whether by a government agency or if you get caught up in a lawsuit, you really want your tax returns to match your financial records and that information has to have reference to the bank account, so the last thing we would ever want is for a tax return to be audited.
So, our role as an accountant is mainly
#1: Create Financial statements
This is the true reports that you're going to use the vast majority of the time
The Profit and Loss is going to be reporting all income and all expenses to yield net profit or net loss. Did you make money, did you lose money? This report is also used to determine tax liability.
Then you have a Balance Sheet
It is a Statement of assets, liabilities, and equity. What is owned, owed, and by who. This report is used to determined overall financial position of the company
#2: Business Entity choices
These are common questions we get from people who are new to beginning a business, such as "What should I do?" Do I start this as a sole proprietorship, an LLC, or Do I find a S corporation?
We usually advocate starting with a sole proprietorship to at least get your feet wet and determine whether this is something you want to accomplish.
Sole proprietorship can only have one owner, no liability protection. As a sole proprietor, there’s no separation between your personal and business assets and expenses.
Partnerships can have more than one owner. Partnerships are the simplest structure for two or more people to own a business together and Liability is generally limited to stake in the partnership.
Separate entity, separation of liability. The corporation functions and operates independent of its owners. C Corporation. S Corporation.
A variation of one of the above entities but as a separate entity with liability protection.
#3: Tax implications
Income is reported on the individual return Schedule C. Income is subject to regular income tax, and self-employment tax (15.3%). Qualified for the 20% QBI Deduction - this deduction provides a great benefit.
Income is reported on the partnership return 1065. From there, each partner receives a K1 with his or her share to be reported on the individual tax return. Income is subject to regular income tax, and self-employment tax (15.3%). Qualifies for the 20% QBI Deduction.
Income is reported on the corporate return 1120 or 1120S (S Corporation). Each shareholder receives a K1 with his or her share to be reported on the individual tax return. Income is subject to income tax only and qualifies for the 20% QBI Deduction. S Corporation owners must take a W2 wage salary as part of his or her compensation.
Same as one of the above depending on ownership.
#4: Tiered Entities
When you have one company owning another company.
S Corporation as parent company
An S Corporation can own another S Corporation or an LLC. If the S Corp is the full owner of an LLC, then the LLC income and expenses are reported as combined with the S Corp.
Partnership (or multi-member LLC)
Partnerships can be owned by individuals or any other entities, partnership income flows to the owners and can continue flowing through multiple entities until it reaches the individual.
C corporations are best for large companies or those who wish to be publicly traded. Income does not flow to owners, only the value of the stock changes.
#5: Mistakes Business Owners Make
The first potentially costly mistake made by business owners is in selecting the wrong entity type for their company. Choosing the correct structure for your business will have long-term implications on how the owners are compensated and how the income of the business gets taxed
Taking on partners (it is just like a marriage). Business partners will give you better access to knowledge and skill sets. It is not just the money that matters when you select a partner; the knowledge and expertise they bring in equally a big asset. And they will be passionate about your company as you are and stay through thick and thin.
Comingling of assets, not keeping personal and business separate.
Purchasing personal items with business funds (FOOD is not a deduction).
Using personal money to pay for business expenses (Phone, gas, health insurance).
Taking an over-relaxed, or overzealous, attitude toward your business dealings and responsibilities (taking on debt to fund your lifestyle).
Lack of organization and planning. Take the time to know where you stand.
Trusting what you read on the internet or watch on YouTube.
In conclusion, it is necessary for you to
Set up your business properly and completely
Understand both accounting and tax implications of all transactions
Do not get in over your head or go off half-cocked
Seek help from fiduciary professionals (not trying to sell you sth)
File your tax returns on time (extensions cost you money)
Constantly evaluate your decisions but do not give up unless it is truly the right thing to do
Finally, success takes time and a great deal of determination. Self-employment is not for the faint of heart.
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