It’s no secret that starting an LLC is the first major step in becoming a small business owner. Once you’re finally there, however, it’s important to understand the technicalities of the law surrounding your business type. Here are some do’s and don’ts for small business owners.
DO: Pay yourself fairly
Once you form your LLC or corporation, it’s important to pay yourself a fair wage: personal service compensation is considered a business expense that’s deductible if it’s a reasonable amount. According to Avvo.com, there are five factors that employers should consider when determining a reasonable wage that avoids auditing by the IRS. The employee’s company role, the company’s condition and character, a wage comparison of employees in similar fields of other companies, conflict of interest, and finally, the “internal consistency of salaries paid to all employees of the company.”
DON’T: Neglect Employee Classification
There are two options that the IRS has for corporations to be taxed: either as a C corporation or an S corporation, and one major step after you learn how to form an LLC is to remember to classify your employees correctly. If your employees aren’t classified correctly, you may end up with an employment tax liability you weren’t expecting. While an employee is hired by and remains employed by their employer the whole time, an independent contractor works as a service provider to your company, but isn’t technically employed by it. It’s important to understand these critical differences, especially when tax season rolls around.
DO: Emphasize record-keeping
Keeping records is a critical part of operating any legitimate business, whether you want to form corporations or are more interested in setting up LLCs. Well-maintained and organized records make your life much easier when tax season comes. Plus, keeping business records accurate and up-to-date just makes sense. If you’re ever in need of a tax professional, having accurate records makes the process exponentially easier.
DON’T: Let Losses Be Disallowed as Hobby Losses
When you form your LLC, you should know that the IRS considers a ‘hobby’ to be an activity that doesn’t generate profit. A few examples of activities that may be classified as hobbies under the IRS are farming, multi-level-marketing efforts, horse breeding, and airplane or yacht charters.
Ultimately, these are just a few do’s and don’ts for small business owners to be aware of. For more information about how to form your LLC, contact My USA Corporation.
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