Incorporation & Business Start Up Planning

More than just accounting, Reliance can handle the paperwork you need to get your company moving.

Set-up. Reliance has helped many of our clients set up corporations. Reliance charges approximately $700 - $900 to incorporate a business. Our fee includes:

• Incorporation paperwork and fees to the State of Illinois
• Incorporation paperwork with county
• Apply for EIN #
• Apply for S Status
• Apply for Illinois Registration #
• Apply for Illinois Unemployment # (if Payroll)
• Apply for Sales Tax # (if taxable sales)
• Minute Books
  • Initial Board Meeting Minutes
  • Setting up corporate book

There are many business circumstances that have led to the increase in legal formations:

• Many individuals continue to be downsized out of their corporate jobs and end up starting or purchasing a business.
• Corporations continue to reclassify employees to independent contractors for a number of business reasons.
• Many industries (like insurance and real estate) begin their salesman as an employee and than convert them to independent contractor status.

Below is basic summary outlining some of the topics individuals will face when starting up a new business.

Employee vs. Independent Contractor

Employee

• Employer incurs employer portion of FICA, unemployment insurance tax and withholds federal and state taxes from employee
• Employee W-2
• Employee usually receives fringe benefits (health insurance, vacation pays etc.)
• Employee deducts any work related expense on Form 2106 of his tax return (which flows to schedule A and is subject to a 2% AGI limitation)
• If insurance not provided by employer, employee can deduct but is subject to 10% AGI limitation.

Independent Contractor - Can operate as sole proprietorship, corporation (S or C), LLC

Sole Proprietorship

• Advantages
  • Easy to form/simple to operate
  • Less administration
• Disadvantages
  • No corporate liability protection
  • Double FICA tax – Earnings of the SP are subject to self employment tax

S-Corporation

• Advantages
  • Corporate liability protection
  • Distributions from the S-Corporation are exempt from payroll taxes (assuming adequate compensation to employee shareholders)
  • Pass through entity – taxed at individual’s tax rates
• Disadvantages
  • Individual tax rates may be higher than corporate tax rates

C-Corporation

• Advantages
  • Corporate liability protection
  • Corporate rates may be less than individual tax rates
• Disadvantages
  • NOL’s are not used immediately
  • Double taxation – less flexibility in terms of distributions than S-Corps.

LLC

• Advantages
  • Similar benefits as Sub-S Corporation
  • Corporations and P-ships can be members of LLC
• Disadvantages
  • Higher costs (initially and annually)
  • Relatively new – tax laws may change

Auto Expense

Lease vs. Buy – Which is better? Depends on the economics of the deal.

• If Lease – deduct lease payments x % used for business
  • Penalty for high mileage
• If Purchase
  • Option 1 – Use IRS mileage rate (includes gas, maintenance, depreciation etc.)
    • Business miles (not commuting miles) x standard rate as a deduction on Schedule C (SP) or corporation return (S, C or LLC)
    • Better than other options if driving a lot of miles
    • Technically need to record miles
  • Option 2 – Purchase car and depreciate
    • Only depreciate % of car used for business
    • Can also deduct gas costs
    • Depreciate recapture if do not trade in
    • Deduct Actual Costs
      • Keep receipts for maintenance costs of car

Health Insurance

Insurance (premiums) on owner of SP, S-Corporation & LLC are deductible on individual’s return as an adjustment to AGI (not subject to 10% limitation)

• Options for employees
  • HRA
  • HSA
  • Traditional

Payroll

• Sole Proprietorship
  • Owner
    • No payroll filings necessary
    • Estimated payments required 4 times a year
      • Need to estimate tax liability on earnings of company – penalties if payments do not match income
• Employee
  • Will need to file Form 941, IL-941, UI-3/40 (IL unemployment compensation) quarterly. 940EZ (federal unemployment annually)
  • Deposits more frequent for federal withholding and FICA depending on size of payroll (if federal withholding + FICA are > $2,500 than must deposit monthly with your bank)
• S-Corporation
  • Owner & Employees
    • Will need to file Form 941, IL-941, UI-3/40 (IL unemployment compensation) quarterly. 940EZ (federal unemployment annually)
    • Deposits more frequent for federal withholding and FICA depending on size of payroll (if federal withholding + FICA are > $2,500 than must deposit monthly with your bank.

Home Office

• Advantages:
  • Owner - If no office and you use part of your home exclusively as an office can deduct the % (square footage of home office/total square footage of home) amounts paid for costs associated with the home.
  • Can depreciate the % of house used for business (39 years)
• Disadvantages
  • Depreciation recapture upon sale of house

Where do I begin?

• Set up corporation (if applicable)
  • Usually $1,000 capital contribution + incorporation costs
• Register with County
• Register with Illinois
• Set up new checking account in corporate/business name
• Obtain credit card in corporate/business name
• Track personal payments in/out of corporation
• Track business meal & entertainment
• Liability, renters (furniture etc.) and workers compensation insurance (if employees)

Seem like a lot of information?

Don't worry, Reliance can break it down so you don't have to. Whether you are just starting out, or have come to the realization that you need a strong accountant in your corner, don't hesitate to call Reliance today!