How do I know whether I have what it takes to run my own business?
Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.
When determining what business is “right for you,” consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you’re willing to make to run a business.
Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?
Is a home-based business right for me?
To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what’s involved, and a lot of hard work.
You have to be willing to plan ahead, and then make improvements and adjustments along the road. Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.
What kind of records do I need to keep in my business?
Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that help you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.
Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.
To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied-up in inventory. They should reveal which of your product lines, departments, or service are making a profit, as well as your gross and net profit.
The Basic Recordkeeping System
A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records.
An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.
What costs should I consider in determining how much to charge for my products or services?
Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity’s total cost, and therefore fail to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service. Cost components include material, labor and overhead costs.
Material Costs are the costs of all materials found in the final product.
Labor Costs are the costs of the work that goes into the manufacturing of a product. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel-hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers’ compensation, unemployment compensation, insurance, retirement benefits, etc.
Overhead Costs are any costs not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat and light, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling and/or storage as well as other cost components.
Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It’s best to project the costs semiannually, including increased executive salaries and other projected costs.
What is self-insurance?
With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional health care providers. Funding comes through establishment of a trust or a simple reserve account.
As with other health care plans, the employee may pay a portion of the cost in premiums. Catastrophic coverage is usually provided through a “stop loss” policy, a type of coinsurance purchased by the company. The plan may be administered directly by the company or through an administrative services contract.
As a small employer, what do I need to know about employee benefits?
The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage, including Social Security, unemployment insurance, and workers’ compensation. Funding for the Social Security program comes from payments by employers, employees and self-employed persons into an insurance fund that provides income during retirement years.
Full retirement benefits normally become available at age 65. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income and Medicaid. Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program.
Employer payments, based on total payroll, contribute to the program. Workers’ compensation provides benefits to workers disabled by occupational illness or injury. Each state mandates coverage and provides benefits. In most states, private insurance or an employer self-insurance arrangement provides the coverage. Some states mandate short-term disability benefits as well.
A comprehensive benefit plan can include the following elements health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, and leave. A benefit plan can also include bonuses, service awards, reimbursement of employee educational expenses and perquisites appropriate to employee responsibility.
Before you implement any benefit plan, you should decide what you’re willing to pay for this coverage. You may also want to seek employee input on what benefits interest them. For instance, is a good medical plan more important than a retirement plan? Furthermore, you must decide whether it is more important to protect your employees from economic hardship now or in the future. Finally, you must decide if you want to administer the plan or have the insurance carrier do it.
Must I report employer reimbursements for travel, entertainment and meals?
It depends. If you give your employer a detailed expense accounting, return any excess reimbursement, and meet other requirements, you don’t have to report the reimbursement-and don’t deduct the expenses.
This means that any deduction limits are imposed on your boss, not you, and the 2% limit on miscellaneous itemized deductions won’t affect your travel, entertainment and meals costs.
What are the limits on deductible travel, entertainment and meals costs?
There are no dollar limits. Expenses must be “ordinary and necessary” (meaning appropriate and helpful) and not “lavish or extravagant”, but this doesn’t bar deluxe accommodations, travel or meals.
Deduction for business entertainment and business meals can’t exceed 50% of the cost.
There are additional special limitations on skyboxes and luxury water travel.
What expenses can or cannot be deducted while traveling away from home?
A wide range of expenses can be deducted while traveling away from home.
Here are the main ones:
- Transportation fares, or actual costs (or a per mile rate) of using your own vehicle. Also, transportation costs of getting around in the work area-to and from hotels, restaurants, offices, terminals, etc.
- Lodging and meals (subject to the 50% limit on meals)
- Phone, fax, laundry, baggage handling
- Tips related to the above
The following travel expenses cannot be deducted:
- The cost of commuting between your residence and a work site, but it’s a deductible business trip if your residence is your business headquarters.
- Travel as education
- Job hunting in a new field or looking for a new business site
Do I need an attorney to incorporate?
No! Having an attorney is not a legal requirement to incorporate, except in South Carolina (a signature by a SC attorney is required on articles of incorporation). In all other states, you can prepare and file the articles of incorporation yourself; however, it is highly recommended to consult a Certified Public Accountant (CPA).
Discussing incorporation with a CPA will allow you to be advised on the best form of business that matches your needs. In addition, a CPA will assure that all forms are filed timely with the proper taxing authorities.
If you are unsure of what steps your business should take, please call us at 562-868-6333 and take advantage of our Free Consultation; we can form your corporation and save you money.