Questions to Ask a CPA When Starting a Business

Starting a new business involves many decisions, and navigating the financial and tax landscape can be complex. Engaging a Certified Public Accountant (CPA) early is a sound strategy. A CPA offers expert guidance to clarify financial intricacies, ensure regulatory adherence, and establish a strong financial foundation. Their knowledge saves time, reduces errors, and provides peace of mind, allowing you to focus on business growth.

Structuring Your Business for Tax Efficiency

One of the initial and most impactful decisions for a new business involves its legal and tax structure. This choice directly affects how the business is taxed, owner liability, and administrative complexities. Business owners should consult with a CPA to understand the tax implications of various entity types.

A CPA can explain the differences between common structures: Sole Proprietorship, Partnership, Limited Liability Company (LLC), S Corporation, and C Corporation. Sole Proprietorships, Partnerships, and S Corporations are “pass-through” entities, with income and losses reported on the owner’s personal tax return. A C Corporation is taxed as a separate legal entity, paying corporate income tax on its profits. This can lead to “double taxation” if profits are distributed as dividends, which are then taxed again at the individual level.

Understanding how owner compensation is treated under each structure is important. For a Sole Proprietorship or Partnership, owners typically take “draws” from the business, subject to self-employment taxes. In an S Corporation, owner-employees can receive a reasonable salary subject to payroll taxes, with remaining profits distributed as tax-free distributions. For a C Corporation, owner-employees receive salaries and potentially dividends, both with distinct tax treatments.

Asking a CPA about liability protection is valuable. While an LLC or corporation offers legal separation between personal and business finances, the tax treatment varies. A CPA helps select the most tax-advantageous structure that aligns with business goals, number of owners, and projected income. This initial consultation can prevent costly restructuring and optimize tax liabilities from the outset.

Understanding Your Tax Compliance Requirements

Beyond the initial business structure, understanding ongoing tax compliance obligations is crucial. Businesses face various federal, state, and local tax requirements that must be met to avoid penalties. A CPA assists in identifying these obligations and establishing compliance procedures.

At the federal level, a new business will likely need an Employer Identification Number (EIN) from the IRS, required for hiring employees, opening bank accounts, and filing taxes. For pass-through entities, owners are responsible for making estimated income tax payments to cover their tax liability on business profits. C Corporations, conversely, pay corporate income tax directly.

If the business plans to hire employees, federal payroll taxes become a significant compliance area. These include federal income tax withholding from employee wages, as well as Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. Additionally, the Federal Unemployment Tax Act (FUTA) requires employers to contribute to federal unemployment insurance. A CPA can clarify the specific rates and wage bases for these taxes.

State and local tax obligations vary widely but often include state income taxes, state sales taxes (if applicable), and state unemployment insurance. Businesses should inquire about specific state unemployment insurance rates and any local business taxes or licenses. A CPA can also clarify tax filing deadlines and payment schedules for various taxes. Asking precise questions helps ensure timely registration, proper tax calculation, and accurate filing.

Establishing Financial Management Systems

Setting up efficient internal financial operations and record-keeping is fundamental for a new business. A CPA provides guidance on establishing robust financial management systems from day one. This includes determining the appropriate accounting method for the business.

A CPA can advise on whether the cash or accrual method of accounting is more suitable. The cash method recognizes income when it is received and expenses when they are paid, while the accrual method recognizes income when it is earned and expenses when they are incurred, regardless of when cash changes hands. The choice often depends on the business’s size, complexity, and whether it carries inventory.

Selecting and setting up accounting software, such as QuickBooks or Xero, is another key area where a CPA’s expertise is beneficial. They can help with the initial configuration, ensuring the chart of accounts is properly structured and integrated with bank accounts for efficient transaction tracking. This setup streamlines financial recording and reporting.

Proper expense tracking and understanding deductible business expenses are critical. Businesses should ask their CPA what constitutes an “ordinary and necessary” business expense, defined by the IRS as common, accepted, helpful, and appropriate. Common deductible categories include startup costs, home office expenses, and vehicle expenses. A CPA can explain deduction requirements and emphasize detailed record-keeping.

For businesses with employees, the CPA can guide the setup of payroll systems, whether outsourced or internal, to manage employee withholdings and ensure compliance. This includes understanding payroll tax deposit schedules. Finally, a CPA helps interpret basic financial statements, such as the Profit & Loss statement and Balance Sheet, providing insights for informed business decision-making.