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My fiance and his friend are starting a small business in Austin and need some guidance from a CPA on filing the paperwork with the state of Texas. They considered going through legalzoom.com but felt more comfortable with meeting someone face to face in case they needed to ask questions about state specific laws and statutes.
They are starting a small video game/creative services company...nothing complicated but they want to make sure that they take the proper steps to register the business and many people have suggested that using a CPA might be the best option since they will need someone to do their taxes once the business is off the ground and running.
Can anyone recommend a good CPA that is knowledgable about setting up a small business and is familiar with the proper paperwork that needs to be filed?
Well, the paperwork is so easy and simple a 5th grader can do it. It can be accomplished, literally, in less than 30 minutes by downloading the boilerplate forms from the TX Sec of State website, completing the blanks, and faxing them back with a Credit Card authorization form. So, the act of filing is simple. You do have to verify availablity of the Corp name and DBA to be used though. That can be done by phone with Sec of State.
But what you probably should receive guidance on is the legal entity you want to form. That guidance would come from a business attorney, not a CPA, and it would depend on the nature of risks and liabilities involved and the nature of the relationship the two owners wish to have. Most likely it would be a General or Limited Partnership registered as an LLC.
An accountant is not needed until profit is generated at a level at which tax strategy becomes important. Most new business lose money and fail, and that's not a complicated tax return to complete if there are no assets or profit.
There are probably some experienced legal/accounting people on the forums who will give more details, I'm not an expert.
My fiance and his friend are starting a small business in Austin and need some guidance from a CPA on filing the paperwork with the state of Texas. They considered going through legalzoom.com but felt more comfortable with meeting someone face to face in case they needed to ask questions about state specific laws and statutes.
They are starting a small video game/creative services company...nothing complicated but they want to make sure that they take the proper steps to register the business and many people have suggested that using a CPA might be the best option since they will need someone to do their taxes once the business is off the ground and running.
Can anyone recommend a good CPA that is knowledgable about setting up a small business and is familiar with the proper paperwork that needs to be filed?
Thanks in advance for your advice and help!
you need an attorney not a cpa. It should cost you under 1K which is inclusive of the filing fees. You will most likely make an S corp and should focus on the by laws and a bit on the articles of incorporation. S corps flow their taxes to the owners tax returns so If you have multiple owners you might want to do a C corp.But if you do distributions that arent wages then you get double taxed
you need an attorney not a cpa. It should cost you under 1K which is inclusive of the filing fees. You will most likely make an S corp and should focus on the by laws and a bit on the articles of incorporation. S corps flow their taxes to the owners tax returns so If you have multiple owners you might want to do a C corp.But if you do distributions that arent wages then you get double taxed
Actually the non-W2 distributions are very tax advantaged. My wife and I are set up as S-Corp owners. We take minimum salaries and the rest in Owner Distributions, which are not subject to payroll taxes or deductions. This is such an advantageous setup that the IRS has started cracking down and auditing S-Corps. My accountant actually called me last year and said we needed to start increasing our W2 salary payments to a higher wage, even though the wage we pay ourselves has always been what I think is defensible and justifiable. Still, I don't want to be audited (again).
As IRS audits of S-corps increase during 2006 there is a defacto definition of a required reasonable salary paid to working owners. A minimum of 30% to 40% of net taxable profits (before deducting your salary) has been deemed reasonable in many cases. The significance of "salary" rather than "profits distributions" is that "salary" is subject to Social Security and Unemployment taxes. Retirement Plan contributions are based on a percentage of your salary.
Actually the non-W2 distributions are very tax advantaged. My wife and I are set up as S-Corp owners. We take minimum salaries and the rest in Owner Distributions, which are not subject to payroll taxes or deductions. This is such an advantageous setup that the IRS has started cracking down and auditing S-Corps. My accountant actually called me last year and said we needed to start increasing our W2 salary payments to a higher wage, even though the wage we pay ourselves has always been what I think is defensible and justifiable. Still, I don't want to be audited (again).
If you want to maintain the benefit of distributions setup a structure with a C corp as the general partner in a limited partnership. I have a lawyer who can do this for you (expensive, about 10K to setup).
Limited partnerships can distribute all their money as distributions vs. w-2 wages, however they dont have liability protection for general partners. To get around this a C corp is the general partner and you are shareholders in the C corp. This bypasses the paying yourself fair wages requirement of an S corp and has held up in IRS rulings.
There are also ways to protect your corporate entities from your personal liability so if someone sues you personally they cant take your company. Although if it is just the two of you it hardly matters.
If you want to maintain the benefit of distributions setup a structure with a C corp as the general partner in a limited partnership. I have a lawyer who can do this for you (expensive, about 10K to setup).
Limited partnerships can distribute all their money as distributions vs. w-2 wages, however they dont have liability protection for general partners....
Yeah, that's why I think the setup will be determined by the nature of the exposure to risk and liability. New S-Corps are not as popular now as LLCs. I don't know all the ins and outs of why, but I think LLCs offer the best balance of advantages for small professional companies.
I will throw out there that an LLC is not a true tax entity per se. If you form as an LLC and don't designate tax entity you are either a sole proprietor or partnership depending on the number of individuals involved.
Do you need a tax attorney? I don't believe so for a simple busness formation. A CPA is a little less costly typically because you don't have the JD lumped on top of the CPA. But that's JMO.
I am a CPA and I specialize in small business (in WA now, no longer in TX...though I have a TX client still). I would tell you your best money spent would be to hire a knowledgable bookkeeper with at least a 2 year degree or stay at home mom who is an accountant or CPA from her former life (that's me). All my clients, save for one, came to me because their books were an absolute mess because they were doing them on their own and had no accounting knowledge.
In Austin, most people like that will charge anywhere from $50-$80 an hour depending on their prior experience and expertise. Lower end if they come from the audit side and higher end if they come from a tax background. I can typically knock out in an hour what my clients were typically spinning their wheels in frustration for 4-5 hours with nothing to show for it. Get someone good from the get go and you will sleep better and have the appropriate financial data with which to make business decisions. Trust me, it costs far more to unravel someone's mess than it does to start it clean from square one!
I will add that UT has one of the finest accounting programs in the country. You can probably find a college senior or MPA candidate to do it for you as well.
I am an attorney and work with small start-ups here in Austin all the time. I also have CPA recommendations for small start-up companies here in Austin. Doing things the right way the first time doesn't have to be expensive and will save you money in the future. PM me if I can be of any help.
Yeah, that's why I think the setup will be determined by the nature of the exposure to risk and liability. New S-Corps are not as popular now as LLCs. I don't know all the ins and outs of why, but I think LLCs offer the best balance of advantages for small professional companies.
Steve
LLC's are about the same S corps, except they have slightly easier rules on board meetings. They also dont have to distribute money based on membership percentages. The self employment tax situation of LLCs however is in flux.
Also LLC's while they are supposed to have protection from outside liability have not had cases in texas to uphold charging order. So even though in theory if you have liabilities, your LLC assets are protected, it isnt necessarily the case. In florida a man had liabilities outside his LLC, but because he was the sole owner of the LLC, the court ruled that his assets inside of the LLC could be taken to pay his personal debts
Most accountants have no clue about this so beware.
There are other issues:
S-corps - distributions must be made in proportion to stock ownership. You must pay yourself a fair wage. The IRS gets to decide what is fair. There was a case of a doctor who made $5M. He paid himself 1M as wages and 4M as distributions. the IRS claimed all 5M was wages and came after him for the medicare (1.45% on $4M = 60K).
LLC's - the IRS can come back and say that your distribution to members was actually a guaranteed payment and therefore is subject to payroll taxes. Right now the self employment tax treatment of LLC's is ambiguous. Many accountants treat managing employees as 100% wages (SE tax applies) and non managing members as 100% distributions (SE tax does not apply).
LP - Can distribute money in any proportion. IRS rulings have upheld distributions are not subject to SE tax (if you do it right). No liability protection for general partners.
The structure I mentioned is complicated, but gives you the most protection from outside liability AND tax benefit.
LLC's are about the same S corps, except they have slightly easier rules on board meetings. They also dont have to distribute money based on membership percentages. The self employment tax situation of LLCs however is in flux.
Also LLC's while they are supposed to have protection from outside liability have not had cases in texas to uphold charging order. So even though in theory if you have liabilities, your LLC assets are protected, it isnt necessarily the case. In florida a man had liabilities outside his LLC, but because he was the sole owner of the LLC, the court ruled that his assets inside of the LLC could be taken to pay his personal debts
Most accountants have no clue about this so beware.
There are other issues:
S-corps - distributions must be made in proportion to stock ownership. You must pay yourself a fair wage. The IRS gets to decide what is fair. There was a case of a doctor who made $5M. He paid himself 1M as wages and 4M as distributions. the IRS claimed all 5M was wages and came after him for the medicare (1.45% on $4M = 60K).
LLC's - the IRS can come back and say that your distribution to members was actually a guaranteed payment and therefore is subject to payroll taxes. Right now the self employment tax treatment of LLC's is ambiguous. Many accountants treat managing employees as 100% wages (SE tax applies) and non managing members as 100% distributions (SE tax does not apply).
LP - Can distribute money in any proportion. IRS rulings have upheld distributions are not subject to SE tax (if you do it right). No liability protection for general partners.
The structure I mentioned is complicated, but gives you the most protection from outside liability AND tax benefit.
Respectfully disagree. I think most CPA's know about this. I often have to correct clients perceptions of this exact issue. LLC sounds good in terms of legal protection but very often does not pan out in certain circumstances.
And reality check, if you don't pay your taxes, even if a C Corp, the IRS can eventually seize your personal assets.
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