An alternate perspective is that entrepreneurs should be paid three times:
If you’re not getting paid three times, here’s how it can work.
First: Your Services
Just like the employees and contractors we work with, we should get paid for the actual work we perform in our business. Most of us wear many hats in our business, and we need to recognize the value of the roles we fill.
As your business grows, the tasks you initially performed will be delegated to employees. They would never go without a paycheck, and you shouldn’t either.
The amount you pay yourself should be similar to the market rate you would have to pay someone if you hired someone else to do the jobs you are doing. As your company grows, you will be going up the management ladder and your salary should increase accordingly.
If you have cash flow problems paying yourself or others, then you might have one of two problems:
Second: Your Risk
After you’ve paid yourself for the jobs you are doing in your own company, there should be something left over: profit. As a business owner, you have earned that profit; it’s your reward for taking the risks that go with business ownership.
If there’s no profit left over, then there could be a number of problems. This is where accounting professionals can help you review the revenues and expenses in your business to identify and rectify issues.
Third: Your Going Concern
A third way to get paid is when you sell your business. There are many things you can do throughout the years to boost your business valuation, and the more you can do that, the higher the proceeds will be from your business.
One of the factors that can increase all three forms of compensation is your financial skill set. Building your financial skills by working with accounting professionals can help you price your goods and services accurately, improve your cash flow, hire employees at the right pay rates, and implement many more financial success factors in your business.
Best Choice of Entity
Are you operating as a corporation, limited liability company, partnership, or sole proprietor? More importantly, is the entity you are operating under providing you with the greatest tax benefits and separation from personal liability? If not, you might want to explore the alternatives to make sure you are taking the amount of risk that is right for you.
Employees or Contractors
Are your team members properly categorized when it comes to the IRS’s rules about employees versus contractors? Unfortunately, it is not about what you and your team member decide you want.
If you decide to hire contractors and the IRS determines they are employees, you could owe back payroll taxes that can cripple a small business. So you will want to do the right thing up front and make sure you and the IRS are in agreement, or be willing to take a future risk. (Check out this article for more information on proper classification of employees and contractors.)
If you would like to protect yourself from possible losses through a disaster, theft, or other incident, insurance can help. There are a lot of kinds to choose from, and you will likely need more than one. At the minimum, consider if you need coverage through:
You may also want personal umbrella insurance, life insurance, and health insurance. Check with an insurance agent to get a comprehensive list of options.
Sales Tax Liability
Are you sure you are collecting sales tax where you should be? Each year, the states roll out new rules for liability. For example, if one of your contractors lives in another state, you may owe sales tax on sales to customers who live there even if you do not live there or have an office there.
Nexus is a term that describes whether you have a presence in a state for tax purposes. Having an office, an employee or contractor, or a warehouse can extend nexus so that you would need to collect and file sales tax for those states. Make sure to do your homework to ensure you are properly managing sales tax liability.
Most small businesses make the mistake of underpricing their services, especially when they start out. If you started out that way, it is awfully hard to catch up your pricing to a reasonable level. Knowing the right price to charge can make the difference between whether the company last six months or six years. You can mitigate this risk by getting cost accounting help from your accountants who can help you calculate your margins and determine if you are covering your overhead and making a profit.
Legal services can be expensive for a small business, so sometimes owners cut corners and take risks. Attorneys are needed most when it comes to setting up your entity, reviewing contractual agreements such as leases and loan agreements, settling conflicts, advising on trademark protection, and creating documents such as terms of service, employment agreements, and privacy policies. Just one mistake on any of these documents can cost a lot, so consider the risks before short-cutting these areas.
Incomplete or incorrect books are a big risk of doing your own accounting and taxes. You may end up paying more taxes than necessary if you leave out deductions you are entitled to. Worse, if you do your books wrong, you could end up overpaying taxes without even realizing it. A common bookkeeping error results in doubling sales, and while it might look good, you certainly do not want to pay more than what has been truly received.
How did you do with these seven risks? If you need to reduce your risks in any of the areas, feel free to reach out for our help.
Many businesses utilize individuals who classify themselves - or are classified by the business owner - as an independent contractor. This may seem to be an efficient and effective solution for many situations. However, there are stiff penalties and fees if an individual is incorrectly classified as a contractor rather than an employee.
For a review of factors that will help you determine how to properly classify your workers, check out this article: IRS Rules for Classifying Workers.
This general information should not be acted upon without first determining its application to your specific situation. Please contact your CPA or tax advisor for additional details.
Successfully meeting the challenges inherent to new and smaller businesses provides me with a special type of satisfaction.