What to Ask an Accountant When Starting a Business

Starting a new business presents a landscape of opportunities alongside significant financial and legal challenges. Navigating this environment successfully often hinges on securing expert guidance from the outset. An accountant serves as a vital resource, offering specialized knowledge that helps entrepreneurs establish a strong financial foundation, ensure compliance with regulations, and make informed decisions for long-term viability. Leveraging an accountant’s expertise effectively requires knowing which questions to ask, transforming potential pitfalls into pathways for growth.

Choosing the Right Business Structure

Selecting an appropriate business structure is a foundational decision for any new enterprise, influencing everything from tax obligations to personal liability. An accountant can provide clarity on common structures like Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), S Corporations, and C Corporations, guiding you toward the optimal choice for your specific goals.

Sole Proprietorship

A Sole Proprietorship is the simplest and least expensive structure to form. The owner reports business income and expenses on their personal tax return using Schedule C, and profits are taxed at individual income tax rates. This structure offers no personal liability protection, meaning the owner’s personal assets are not shielded from business debts or lawsuits. Ask your accountant about the implications of unlimited personal liability and how projected income might affect your individual tax bracket.

Partnerships

Partnerships involve two or more individuals who share ownership, profits, and losses. For federal tax purposes, partnerships are “pass-through” entities; the business itself does not pay income tax. Instead, income and losses pass through to the partners, who report their share on their individual tax returns via a Schedule K-1. While a general partnership exposes all partners to unlimited personal liability, limited partnerships (LPs) and limited liability partnerships (LLPs) can offer some liability protection. Ask your accountant how profit distributions and potential losses will affect each partner’s personal tax situation and the extent of personal liability protection each partnership type offers.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) combines aspects of corporations and partnerships, offering owners personal liability protection similar to a corporation while maintaining the flexibility and pass-through taxation of a sole proprietorship or partnership. For federal tax purposes, a single-member LLC is typically taxed as a sole proprietorship, while a multi-member LLC defaults to partnership taxation. An LLC can elect to be taxed as an S Corporation or C Corporation. Inquire about the process of electing a specific tax treatment for your LLC and how this choice impacts self-employment taxes and potential future growth.

S Corporations

S Corporations are distinct in their tax treatment, allowing profits and losses to be passed directly to the owners’ personal income without being subject to corporate tax rates, thereby avoiding “double taxation.” To qualify for S Corporation status, a business must meet specific IRS criteria. While S Corporations offer limited liability protection for shareholders, they also require more administrative formalities than sole proprietorships or partnerships. Ask your accountant if potential self-employment tax savings, where only wages are subject to payroll taxes and distributions are not, outweigh the increased administrative complexity and compliance requirements.

C Corporations

C Corporations are separate legal entities, distinct from their owners. They are subject to corporate income tax on their profits at the federal level. When profits are distributed to shareholders as dividends, those dividends are taxed again at the individual shareholder level, leading to double taxation. C Corporations offer the strongest personal liability protection for owners and have no restrictions on the number or type of shareholders, making them suitable for businesses planning to raise significant capital or go public. Ask your accountant about strategies to minimize double taxation and whether the benefits of unlimited growth potential and robust liability protection align with your business’s long-term vision.

Understanding Your Tax Obligations

Beyond choosing a business structure, a new business owner must grasp the various tax obligations that arise at federal, state, and local levels. An accountant can demystify these complexities, ensuring proper registration, timely payments, and compliance to avoid penalties.

Federal Income Tax

How federal income tax is reported depends on the business structure. Sole proprietors report business income and expenses on Schedule C. Partnerships and multi-member LLCs taxed as partnerships file an informational return and issue Schedule K-1s to each partner or member, who then report their share on individual tax returns. S Corporations also file an informational return and issue Schedule K-1s, with income and losses flowing through to shareholders’ personal returns. C Corporations, as separate legal entities, file their own corporate income tax returns and pay taxes at the corporate level. Ask your accountant to clarify the specific federal income tax filing requirements for your chosen entity.

Self-employment tax

Self-employment tax is a significant obligation for sole proprietors, partners, and LLC members taxed as sole proprietors or partnerships. This tax covers Social Security and Medicare contributions. A deduction for one-half of the self-employment tax paid is allowed on the individual’s income tax return. Inquire about strategies to manage this tax burden and whether electing S Corporation status could offer savings by allowing a portion of income to be taken as distributions rather than salary.

Estimated taxes

Estimated taxes are generally required if a business expects to owe at least $1,000 in tax for the year. This applies to income tax and self-employment tax for sole proprietors, partners, and S Corporation shareholders, as their income is not subject to withholding. Payments are typically made quarterly. Ask your accountant to help calculate your estimated tax liability and set up a payment schedule to avoid underpayment penalties.

State and local taxes

State and local taxes vary significantly by jurisdiction but can include state income taxes, franchise taxes, and various business licenses or permits. Franchise taxes are often levied on businesses for the privilege of existing or doing business in a state. Ask your accountant to identify all applicable state and local tax registrations and compliance requirements relevant to your specific business location and industry.

Sales tax

Sales tax applies to the sale of certain goods and services and must be collected from customers and remitted to the appropriate state and local tax authorities. The obligation to collect sales tax depends on the nature of the business’s sales and whether it establishes “nexus” in a state. Businesses typically need to obtain a sales tax permit before making taxable sales. An accountant can help determine if a business has sales tax obligations, guide them through the registration process, and advise on proper collection and remittance procedures.

Payroll taxes

Payroll taxes become relevant if a business plans to hire employees. These include federal income tax withholding, Social Security and Medicare taxes (FICA), and federal unemployment tax (FUTA). FICA taxes are split between the employer and employee, while FUTA is paid solely by the employer. Many states also have state unemployment tax (SUTA) and may require state income tax withholding. An Employer Identification Number (EIN) is required for businesses with employees, or those operating as corporations or partnerships. Ask your accountant about setting up payroll, understanding withholding requirements, and navigating federal and state payroll tax reporting and payment schedules.

Setting Up Financial Systems

Establishing robust financial systems from the outset is fundamental for accurate record-keeping, informed decision-making, and seamless tax compliance. An accountant can provide practical guidance on setting up these systems.

Chart of Accounts

A foundational element of any financial system is the Chart of Accounts, a categorized list of all accounts used to record financial transactions. This list typically includes asset, liability, equity, revenue, and expense accounts. A well-organized chart of accounts is essential for accurate financial reporting and analysis, allowing a business to track its financial performance and position. Ask your accountant to help customize a chart of accounts that aligns with your specific business activities and reporting needs.

Maintaining Accurate Records

Maintaining accurate and organized financial records is paramount for tax compliance, auditing purposes, and monitoring business performance. This includes tracking all income, expenses, invoices, receipts, bank statements, and payroll records. Records can be kept physically or digitally, with consistency and accessibility being important. Inquire about best practices for record-keeping, including how long to retain documents and efficient methods for organizing them for easy access during tax season or an audit.

Utilizing Accounting Software

Utilizing accounting software is highly recommended for modern businesses, as it automates many financial processes and provides valuable insights. Popular options include QuickBooks and Xero, which offer features like invoicing, expense tracking, bank reconciliation, and financial reporting. The right software can streamline bookkeeping tasks, improve accuracy, and provide real-time financial data. Ask your accountant for recommendations on accounting software that fits your business size, complexity, and budget, and whether training or ongoing support for the chosen software is available.

Separating Personal and Business Finances

Separating personal and business finances is a critical step for new entrepreneurs, regardless of the chosen business structure. This involves opening separate bank accounts and credit cards exclusively for business transactions. Maintaining distinct finances simplifies record-keeping, clarifies tax deductions, and helps preserve personal liability protection for entities like LLCs and corporations. An accountant will emphasize the importance of this separation and can advise on setting up dedicated business accounts, helping to avoid commingling of funds that could jeopardize liability protection or complicate tax filings.

Understanding Financial Statements

Understanding basic financial statements is crucial for monitoring a business’s health. The Profit & Loss (Income) Statement summarizes revenues and expenses over a period, showing net profit or loss, while the Balance Sheet provides a snapshot of assets, liabilities, and owner’s equity at a specific point in time. An accountant can help interpret these statements, explaining what the numbers mean for the business’s profitability, liquidity, and overall financial stability. Ask your accountant how to regularly review these statements to identify trends, manage cash flow, and make informed strategic decisions for growth.