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.