Small Business Is Big Business – A Quick Guide to Setting Up Your Startup
Allyse Carter, CPA
Helping small businesses and individuals at every step of their financial journey.
The hype surrounding entrepreneurship and small businesses is warranted, as this is a common way many of us are employed. Sometimes we start businesses on purpose, and sometimes by accident (think of a side hustle or gig that turns out to be profitable). If you want to join (or already belong to) the millions of small businesses throughout the country, here are a few things you should know and do to get your startup up and running.
1. Know What ‘Small’ Means
Depending on your industry, a “small” business can have up to $50 million in revenue and hundreds (or thousands) of employees. Not so small, right? With that being said, many small businesses have five or fewer employees, and many have only one employee — the business owner.
For tax purposes, your small business stops being considered “small” once you hit $26 million in gross revenue. Once you reach $26 million, you must report your financials on an accrual basis. Gross revenues under $26 million allow the business to report financials on a cash basis. There are year requirements and the $26Ms is adjusted for inflation, but you get the idea.
2. Setup the Foundation
Create the Business Legal Entity: Legal entities are created at the state level, typically through a state agency that oversees corporations. For instance, in Florida, the Florida Department of State manages corporate activity. Within that department is the Division of Corporations, where you file the necessary paperwork to form your entity. Many Floridians know it as "Sunbiz".https://dos.fl.gov/sunbiz/
FYI – Remember the Beneficial Ownership Information Report (BOI). Although mandatory BOI filing is currently in court limbo, there may be a requirement in the future. https://fincen.gov/boi
Obtain an Employer Identification Number (EIN): After your corporate entity is created, get an EIN, even if you never plan to hire employees. EINs are usually required for bank accounts, payroll, and certain tax filings. You can obtain an EIN for free here: https://www.irs.gov/businesses/small-businesses-self-employed/get-an-employer-identification-number
Bank Accounts: It’s highly recommended — and often necessary — to open a separate bank account for your business. Even if you operate as a sole proprietor (meaning the business and the owner aren’t legally separate), a dedicated business account is good practice and helps keep personal and business finances distinct.
Licenses and Permits: Research which licenses and permits your business may need. These vary widely by industry and can be required at multiple levels of government (federal, state, county, municipal).
Insurance: Though this isn’t a sales pitch, it’s crucial to find out what insurance your business needs. Costs can differ vastly depending on your industry. Just ask anyone in construction about their premiums.
3. Startup Costs
Startups have, well, startup costs. The IRS allows up to $5,000 of immediate expensing for these costs if the total is under $50,000. Beyond $50,000, the $5,000 deduction phases out until costs reach $55,000. After $55,000, all startup costs must be amortized over 180 months (15 years). See some excerpts below from a Tax Adviser article explaining startup costs:
What Are Startup Costs?
“Some examples of costs that qualify as recoverable startup costs include an analysis or survey of potential markets, products, labor supply, transportation facilities, etc.; advertisements for the opening of the business; salaries and wages for employees who are being trained and their instructors; travel and other necessary costs for securing prospective distributors, suppliers, or customers; and salaries and fees for executives and consultants, or for similar professional services.... This is not an exhaustive list; however, all these types of costs would qualify for the first-year deduction and 180-month amortization.” – The Tax Adviser
What Aren’t Startup Costs?
“Some costs do not qualify for the first-year deduction and 180-month amortization, as they do not qualify as startup costs. These costs include incorporation expenses, interest, real estate taxes, research-and-experimental (R&E) costs, and costs attributable to the acquisition of a specific property.... Costs attributable to the acquisition of a specific property are subject to depreciation and must be depreciated instead.” – The Tax Adviser
https://www.thetaxadviser.com/issues/2022/nov/deduction-of-startup-expenses.html
4. Create a Business Continuation or Disaster Plan
Disasters can be environmental, natural, cyber, or even personal if the owner(s) become sick or pass away. It’s morbid to think about, but planning how the business will continue (or shut down properly) is essential. The IRS has advice on saving and recreating tax and business records here: https://www.irs.gov/newsroom/reconstructing-records-after-a-natural-disaster-or-casualty-loss
Since nearly every business relies on technology, ensure your data is secure and routinely backed up.
For higher-revenue companies, business continuity planning and key-person insurance policies can be critical. If something happens to an owner or key employee, these measures can allow the business to continue — or provide cash flow to close operations if needed.
Starting a business is an exciting and potentially rewarding journey, but it requires careful planning, research, and vigilance. From selecting the right legal structure and obtaining necessary licenses to managing startup costs and creating a disaster plan, laying solid groundwork will help set up your startup for success. Remember, it’s not just about launching your venture; it’s about steering it toward sustainable growth. It’s not enough to start up — you have to keep going.
· https://www.sba.gov/business-guide/10-steps-start-your-business
· https://www.census.gov/library/stories/2021/01/what-is-a-small-business.html
· https://www.wolterskluwer.com/en/expert-insights/what-is-a-micro-business
· https://www.irs.gov/businesses/small-businesses-self-employed
· https://dos.fl.gov/sunbiz/
· https://fincen.gov/boi
· https://www.thetaxadviser.com/issues/2022/nov/deduction-of-startup-expenses.html