What to Ask a CPA When Starting a Business?

A Certified Public Accountant (CPA) offers valuable guidance for new business ventures, providing expertise across financial, tax, and compliance domains. Engaging with a CPA early helps owners navigate complex financial landscapes, avoid pitfalls, and optimize financial strategies. This article outlines key discussion areas for new business owners with their CPA.

Selecting the Right Business Structure

Choosing a business structure is a key decision, impacting legal liability and tax obligations. A CPA can explain the characteristics and implications of common structures: Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), S Corporations, and C Corporations. Understanding each is essential for aligning the business with an owner’s goals and risk tolerance.

A Sole Proprietorship is the simplest structure, where the business and owner are a single entity for tax purposes. Profits and losses are reported on the owner’s personal income tax return, making the owner personally liable for business debts. Partnerships involve two or more owners who share profits and losses, which pass through to their individual tax returns. Each partner is personally liable for partnership obligations.

Limited Liability Companies (LLCs) offer a blend of partnership and corporate features, providing owners with limited personal liability. Single-member LLCs are taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships, with profits and losses passing through to owners’ personal income tax returns. An LLC can elect to be taxed as an S Corporation or a C Corporation, which can influence self-employment tax obligations for active members.

S Corporations allow profits and losses to pass directly to the owner’s personal income, avoiding corporate tax rates and double taxation. Owners who work for the business are considered both owners and employees, and can potentially reduce self-employment tax through salary and distributions. S Corporations typically file Form 1120-S annually.

C Corporations are separate legal entities from their owners. The corporation itself pays income tax on its profits, which can lead to “double taxation.” Corporate profits are taxed at the corporate level, and again when distributed to shareholders as dividends, taxed at the individual level. C Corporations file Form 1120.

Understanding Your Tax Responsibilities

A CPA can guide new businesses on various tax obligations. Federal income tax, including estimated tax payments, is a primary concern. Businesses structured as sole proprietorships, partnerships, or LLCs taxed as pass-through entities pay self-employment tax, covering Social Security and Medicare contributions.

Estimated tax payments are generally required and typically made quarterly to cover income and self-employment tax liabilities. State income taxes also apply in most states. Businesses may also be subject to local taxes, such as property taxes on business assets or specific business license fees, depending on location and industry.

Businesses selling taxable goods or services must collect and remit sales tax, requiring registration with the state tax authority. Other taxes, such as excise taxes, may also apply. Obtaining an Employer Identification Number (EIN) from the IRS is essential for most businesses, especially those with employees or structured as corporations or partnerships. An EIN is required for filing tax returns, opening a business bank account, and for payroll.

Setting Up Financial Systems

Establishing effective financial record-keeping systems is essential for accurate reporting and informed decision-making. A CPA can assist in selecting accounting software, such as QuickBooks or Xero. These platforms help automate bookkeeping, track income and expenses, and generate financial reports. The CPA can also help set up a chart of accounts, tailored to the business’s specific needs.

Tracking income and expenses is essential for managing cash flow and preparing accurate tax returns. The CPA will explain deductible business expenses, such as office supplies, utilities, rent, and business travel. Maintaining detailed documentation, including receipts and invoices, is necessary to substantiate deductions in case of an audit. A CPA can provide ongoing guidance on maintaining these systems and interpreting financial statements, offering valuable insights into the business’s financial health.

Navigating Employee Payroll and Benefits

Businesses planning to hire employees face additional financial and compliance responsibilities, which a CPA can help manage. Payroll tax obligations include federal income tax withholding, Social Security and Medicare taxes (FICA), and federal unemployment tax (FUTA). Employers are responsible for withholding the employee’s share of FICA taxes and remitting both employee and employer portions to the IRS.

Federal unemployment tax (FUTA) is an employer-paid tax that funds unemployment benefits. State unemployment tax (SUTA) rates and wage bases vary by state, and employers must register with their state’s unemployment agency. Workers’ compensation insurance is also generally required by state law to cover employees injured on the job.

A CPA can advise on the tax implications of offering employee benefits, such as health insurance or retirement plans. Certain benefits may be tax-deductible for the business and tax-exempt for employees. Compliance with federal and state labor laws, including proper classification of employees versus independent contractors, is also a discussion point. This guidance ensures the business meets its legal obligations and manages employee-related costs effectively.