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You're the boss. As the owner of a home-based business, all decisions
will be your responsibility, including those outside your specific area
of expertise. Of course, as a day-care operator you already knew
how to soothe an upset child, but as the owner of that business, do you
know when to file your taxes? As a consultant you have over 20
years' experience advising organizations on personnel matters, but do
you know if it's to your advantage to incorporate? You are an expert
at word processing, but do you know how to develop an efficient record
keeping and billing system? You are the boss now and the good health
of your business depends on your management skills.
The forming of a business organization depends on the following factors:
a) Sole Proprietorship Advantages
Disadvantages
b) Partnership Advantages
Disadvantages
c) Corporation Advantages
Disadvantages
Incorporating does NOT have to be complicated or expensive! SavvyChicks.com offers the lowest cost service on the Internet to prepare the legal paperwork for incorporating a business in any state. 2) Record Keeping Many people hate keeping accurate and up-to-date business records, but it is essential. If you anticipate problems handling this, plan an effective strategy now. Don't wait until tax time or until you are totally confused. Take a course at a local community college, ask a volunteer SCORE (Service Corps of Retired Executives) representative from the Small Business Administration to help you in the beginning, or hire an accountant to advise you on setting up and maintaining a record keeping system. Your records will be used to prepare tax returns, make business decisions, and apply for loans. Set aside a special time each day to update your records. It will pay off in the long run with more deductions and fewer headaches. If your business is small or related to an activity that is usually considered a hobby, it's even more important that you keep good records. The IRS may decide that what you are doing is only a hobby, and you won't be allowed to deduct expenses or losses from your home-produced income at tax time. Keep records of all transactions in which you spend or bring in money. Pick a name for your business and register it with local or state regulatory authorities. Call your city hall or county courthouse to find out how. Your records should reveal how much cash you owe, what you are due from others and what you have on hand. You should keep five basic journals:
Choosing a Record Keeping System Set up your records to reflect the amount and type of activity in your particular business. There are a wide range of prepackaged record keeping systems available. The SBA recommends that a small, home-based business use a system based on the "One-Write System." It captures information at the time the transaction takes place. These One-Write Systems are efficient because they eliminate the need for recopying the data and are compatible with electronic data processing if you should decide to computerize. Even though you may be small and just beginning, it is wise to consult an accountant to discuss which record keeping system is best for your business. Once it is set up, you can record the daily transactions or periodically have a bookkeeper post your daily transactions in your General Ledger and prepare your financial statements. Be sure to establish a separate bank account for your business, well before your first sale. This provides a complete and distinct record of your income and expenditures for tax purposes, and eliminates the need to distinguish between business and personal expenses. It is important to choose a record keeping system that you understand and will use. It will help you see how well the business is doing and is the first step in responsible financial management. 3) Tax Obligations and Benefits Significant tax savings are available to the home-based business owner, including deductions, credits and depreciation allowances. The time, money, and energy you invest to maintain good records and keep abreast of tax laws will ensure that you operate within the law. You must plan for income tax, social security tax (federal self-employment tax), employee taxes (if you hire anyone), property tax on your home and business-related taxes, such as sales tax, gross-receipts or inventory tax (in some states and localities), and excise or individual item taxes (on certain commodities). The Internal Revenue Service supplies the following free booklets (and runs free workshops) to give you details on your specific obligations:
There are various federal and state forms you will need to fill out to start a small business. The federal government requires you to complete:
4. Deducting Ordinary Business Expenses In addition to the home-office deduction, many home-based businesses can also deduct most of the expenses they incur in the daily operation of their businesses. Here is a list of ordinary expenses that qualify as tax deductions on your business return:
Critical Caveats About Insurance 1. Many people have the mistaken notion that their homeowner's or apartment dweller's policy automatically covers their business property, but this is NOT the case. Most homeowner's and renter's policies include a clause that excludes coverage for anything used to conduct business on your premises. In some cases, you may find that running a home business actually violates the coverage of your policy, which will prevent you from making a claim. 2. Your homeowner's or apartment dweller's insurance also doesn't cover liability for accidents or injuries to customers and other visitors to your business. You must purchase additional coverage (an endorsement) to be covered for these mishaps. 3. Your existing insurance probably does not cover business losses in your car. If property is stolen from your vehicle on a business trip, it will not be covered by a typical homeowner's policy. Likewise, your automovbile insurance may not cover a loss if you were driving the car for business purposes. Bottom line: Never assume that you are covered for business purposes on any personal insurance policy. Before you launch your home-based business, have your existing insurance reviewed by an insurance professional to see what risks involved in your business activiite are not covered.
Keep all insurance records and policies in a safe place, preferably in
a safe deposit box. If you keep them at home for convenience, give
your policy numbers and insurance company names to your accountant or
lawyer or put it in your safe deposit box. Always read and understand
the fine print in your insurance policies and reevaluate your business
insurance needs about every six months.
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