Someone recently asked me “what, in my opinion, are the top two or three biggest concerns of a small business?” I couldn’t reply immediately but then gave it some thought.
1) Act like a business!!! Courts might pierce the corporate veil and impose personal liability if there is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham and that the owners are personally operating the business as if the corporation or LLC didn't exist.
2) S-Corps…Make sure that you pay “Reasonable Shareholder Compensation.” The IRS requires that business owners that perform substantial services to their business be paid a salary according to several factors. This is called reasonable compensation. You can’t pay yourself below market and take a large amount in distributions.
3) S-Corps…Keep track of your basis in your business. Two problems arise when shareholders do not have basis in their entity:
i. Current year losses are not allowed to be deducted on your personal tax return.
ii. Distributions to shareholders who do not have basis in their entity are not tax free. They are converted into long term capital gain and taxed at the capital gain tax rates.
4) There is a difference between an employee and a contractor. There are many factors to determine this but, if you have control over what, when, where and how a person performs work for you, the that person is an employee.
i. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee.
ii. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Which leads me into my last important issue. Make sure that you obtain the proper documentation for both employees and contractors at the beginning of your relationship. You will need it when you prepare their W-2 or 1099.
There are so many other important issues but, these are the ones that I run into most in my practice.