Questions to Ask an Accountant When Starting a Business

Starting a business involves navigating financial and tax complexities. Entrepreneurs often face challenges in understanding compliance, optimizing tax strategies, and establishing sound financial practices. Engaging with a qualified accountant early can provide clarity and strategic direction. Professional guidance helps new businesses avoid common pitfalls, ensures adherence to regulations, and establishes a robust financial foundation for future growth.

Choosing Your Accountant

Selecting the right accountant is a foundational step for any new business. Look for a professional with experience working with small businesses, ideally within your industry, for a deeper understanding of financial nuances. Certifications are important; a Certified Public Accountant (CPA) has met rigorous educational and experience requirements. An Enrolled Agent (EA) specializes in tax matters and can represent taxpayers before the IRS. While an EA might be more cost-effective for tax needs, a CPA offers broader financial consulting, auditing, and business strategy services.

When vetting potential accountants, inquire about their communication style and accessibility. Discuss their fee structure, whether it is an hourly rate, a flat fee for specific services, or a retainer. It is beneficial to ask for client testimonials or references from businesses of a similar size or in a comparable industry. This helps understand their approach and how they can add value to your business.

Business Entity and Taxation

Choosing the appropriate business structure is a significant decision for new entrepreneurs, primarily due to its tax implications. An accountant can guide you through the complexities of federal and state tax treatments for various entity types. Common structures include Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), S Corporations, and C Corporations. The choice affects how income is taxed, the owner’s liability for business debts, and administrative burdens.

Sole Proprietorships are simple to set up, with the business owner and business considered the same entity for tax purposes. Business income and expenses are reported on the owner’s personal tax return. Profits are subject to individual income tax rates and self-employment taxes, which cover Social Security and Medicare contributions. The self-employment tax rate is 15.3% on net earnings.

Partnerships involve two or more individuals or entities sharing profits and losses. For federal tax purposes, partnerships are “pass-through” entities, meaning the business itself does not pay income tax. Instead, profits and losses are passed through to the partners, who report their share on their individual tax returns. Partners are also responsible for self-employment taxes on their distributive share of the partnership’s income. Multi-member LLCs are taxed as partnerships by default unless they elect otherwise.

An LLC provides liability protection similar to a corporation while often retaining the tax benefits of a pass-through entity. A single-member LLC is typically taxed as a sole proprietorship, and a multi-member LLC as a partnership. An LLC can elect to be taxed as an S Corporation or a C Corporation by filing the appropriate IRS forms. This flexibility allows for tailoring the tax structure to specific business needs.

S Corporations are also pass-through entities, avoiding corporate-level income tax. Profits and losses are reported on the owners’ personal tax returns. A significant benefit of S Corporations is that owners who work for the business can pay themselves a reasonable salary, subject to payroll taxes. Remaining profits can be received as distributions, which are generally not subject to self-employment taxes. This can potentially reduce the overall tax burden compared to a sole proprietorship or partnership.

C Corporations are legally separate from their owners and are subject to corporate income tax at the entity level. The federal corporate tax rate is a flat 21%. After the corporation pays taxes on its profits, any remaining earnings distributed to shareholders as dividends are taxed again at the individual shareholder level, a concept known as “double taxation.” While C Corporations face this double taxation, they offer benefits such as greater flexibility in attracting investors and the ability to retain earnings for reinvestment. They also provide a broader range of deductible employee benefits.

Accounting Systems and Compliance

Establishing robust accounting systems from the outset is crucial for a new business to manage finances and ensure tax compliance. An accountant helps determine the most suitable accounting method, typically either cash or accrual basis. Cash-basis accounting records income when cash is received and expenses when cash is paid, offering simplicity and a clear picture of cash flow. Accrual-basis accounting records income when it is earned and expenses when they are incurred, regardless of when cash changes hands, providing a more accurate view of financial performance.

Once the accounting method is chosen, the accountant assists in setting up a comprehensive chart of accounts. This organized list of all financial accounts, such as assets, liabilities, equity, revenues, and expenses, is fundamental for accurate record-keeping and generating financial statements. These statements, including the Profit & Loss Statement (Income Statement) and Balance Sheet, provide insights into the business’s financial health and performance. The Profit & Loss Statement summarizes revenues and expenses over a period, showing net profit or loss, while the Balance Sheet presents a snapshot of assets, liabilities, and owner’s equity at a specific point in time.

Beyond initial setup, ongoing tax compliance is a continuous obligation. Businesses are generally required to make estimated tax payments throughout the year to cover their federal income tax liability. These payments, typically made quarterly, ensure taxes are paid as income is earned, avoiding penalties for underpayment. State estimated tax requirements also apply and vary by jurisdiction. An accountant can identify various business deductions that reduce taxable income, such as operating expenses, depreciation of assets, and eligible startup costs. Sales tax obligations are another area of compliance, applicable if the business sells taxable goods or services. An accountant advises on registration requirements, collection, and remittance of sales tax to the appropriate state and local authorities.

Payroll and Employee Matters

When a new business decides to hire employees, a distinct set of financial and tax considerations arises, making an accountant’s guidance particularly valuable. The first step involves obtaining an Employer Identification Number (EIN) from the IRS. This unique nine-digit number is required for tax purposes, including reporting payroll taxes and filing tax returns, acting as the business’s federal tax ID.

Employers are responsible for withholding and remitting various federal payroll taxes from employee wages. These include Social Security and Medicare taxes, collectively known as FICA taxes. Employers also contribute to the Federal Unemployment Tax Act (FUTA) program, which provides benefits to unemployed workers. The FUTA tax rate is 6% on the first $7,000 of an employee’s wages, though employers can often receive a credit for state unemployment taxes paid, reducing the effective federal rate.

In addition to federal obligations, businesses must comply with state payroll taxes, which typically include State Unemployment Tax Act (SUTA) taxes. SUTA rates and wage bases vary by state, and employers usually pay these taxes to fund state unemployment benefits. An accountant assists in setting up a robust payroll system, whether in-house or through a third-party provider, to accurately calculate withholdings, track wages, and ensure timely tax deposits.

Employers have specific reporting requirements. Quarterly, employers typically file Form 941, Employer’s Quarterly Federal Tax Return, to report income, Social Security, and Medicare taxes withheld from employee wages, as well as the employer’s share of FICA taxes. Annually, employers issue Form W-2, Wage and Tax Statement, to each employee, detailing their wages and taxes withheld. An accountant ensures these forms are prepared accurately and filed by their respective deadlines, helping the business meet its employer tax responsibilities.