Rianka R. Dorsainvil, CFP®
Black and brown Americans continue to start small businesses at record rates, excitingly led by Black women who currently account for 2.7 businesses nationwide. Are you one of them? If so, congratulations! The grit and determination from building something from scratch is a success that you can proudly hold for the rest of your life, but it often comes with some heartache as you navigate the ins and outs of entrepreneurship.
Whether the decision to be your own boss stems from pursuing lifelong dreams or through forced entrepreneurship, there are many initial choices to make that can set you up for success or failure. I would know; I started my own business back in 2015, and today, help advise my clients to make smart decisions that will shield them from unnecessary financial risk.
There’s a lot to unpack and decide when you’re first starting out. Let’s examine a few critical areas that can set you up for success at the beginning, or help course correct any missteps you may have taken.
Understand Your Business Structure Options to Help Limit Your Liabilities
When you go from being the employee to the employer, it’s helpful to understand how you’ll pay yourself and what your tax liabilities will be. For that, let’s first talk about the different types of business structures available, and see which will be the most applicable for your needs.
Most small businesses will choose a sole proprietorship, LLC or C-Corp.
Consider single proprietorship or sole ownership as the most basic level. The most important thing to know here is that this designation does not separate your personal assets from your business assets — that means that if a client were to sue you or the IRS were to come after you for back taxes, your personal wealth and assets are all fair game.
However, creating an LLC (Limited Liability Company) business entity does provide that level of support and protection. Fortunately and for simplicity’s sake, you can still file taxes as normal (single, married filing jointly, married filing separately, head of household, etc.) but there is separation between your business income and personal wealth.
Have more than one business partner or are looking to level up?
You might be looking at a C-Corp or S-Corp where you’ll choose a governance committee and compensate shareholders as your revenue increases. It’s important to note that every corporation will start out as a C-Corp, where unlike an LLC, entrepreneurs who chose C-Corps will pay double taxes.
Want to avoid paying the government more?
Electing an S-Corp option will create a flow through entity (Schedule K-1) where businesses are taxed on net profit.
Think of where you currently stand and what your growth plans are for the next few years. Consider your alternate sources of income (like a spouse or additional business revenue), and any dependents that need to be top of mind (like children). From there, consider what structure might match your current lifestyle and business goals.
Sound like we’re only scratching the surface? It’s true. Before choosing which structure suits your business needs, consider your personal situation as well and consult with both the Small Business Administration as well as trusted professionals to help inform your decision.
Avoid the Most Common Pitfall: Paying Quarterly Taxes
There are so many choices to make before launching and during the first few years of entrepreneurship. Luckily, there’s an easy way to sidestep one of the biggest issues we face right from the start: overestimate and earmark your quarterly taxes, now.
That’s right, instead of bi-monthly tax withholdings, most entrepreneurs pay estimated taxes to the state and federal government at quarterly intervals. In general, quarterly taxes should be approximately 20-30% of your gross annual revenue.
One caveat will be in that first year as you likely are splitting income between your old and new roles. Referred to as safe harbor, you should expect to pay 110% of expected income to avoid underpayment penalties if your previous year’s Adjusted Gross Income (AGI) was more than $150,000.
While that might seem like a hard pill to swallow, it’s easier when you have time to digest it up front and make a plan. Few people like tax season, but you’ll like it more without any big surprises.
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