When you are preparing your startup business, one of the first steps should be creating a detailed business plan. This will be important to help you obtain funding to start your business by giving outside investors confidence your business modal will work. A written business plan will help you to uncover problems or inconsistencies in your business, as well as acting as a roadmap on how the business should operate and grow. The business plan will also come in handy by guiding you in planning out your marketing, budgeting, and operational goals.
The next important piece you will need to start a business is to figure out which business entity type would best benefit your business. Choosing a business entity is not an easy decision and depends on a number of factors, such as the amount of legal liability, tax implications, cost of formation & ongoing administration, the flexibility of unique business needs, and future needs. It is best to speak with an experienced accountant to help guide you in choosing which of the four entities is the best fit for your business.
1.) Sole Proprietorships
Another necessity of starting your business is getting a Federal Tax ID Number, also known as an Employer Identification Number (EIN). This number is given to a business entity by the IRS to identify what type of entity your business is and for the IRS to know what your business’s tax liabilities would be.
Your business may also need to file and receive a Sales Tax Permit, this would vary on whether your business sells products or services, the types of services that your business sells, and what state your business is in.
For Rhode Island, businesses that “are selling, renting, or leasing tangible personal retail which includes, but is not limited to: home appliances, craft items, household furnishings, antiques, VCR’s & tapes, jewelry, stereo & TV equipment, computers & computer software.” Services that are taxable in Rhode Island include the furnishing of telecommunications services and cable television services. If you are looking to operate a restaurant in Rhode Island, you will also be responsible in collecting the 1 percent local meals & beverage tax; if you are running a hotel or bed & breakfast, you will be responsible for collecting 6 percent hotel tax.
For Massachusetts, sales tax applies to businesses that “sell or rent tangible personal property (which also includes gas, electricity, & steam) or certain telecommunications services sold or rented in Massachusetts.” In Massachusetts, your business could also fall under the use tax, which is “6.25% of the sales price or rental charge on tangible personal property (including phone and mail order items or items purchased over the Internet, and electronically transferred software) or certain telecommunication services on which no sales tax (or sales tax rate less than 6.25% Massachusetts rate) was paid and which is to be used, stored, or consumed in Massachusetts.” Essentially it is for what you didn’t pay sales tax on, but will be used in Massachusetts. Like Rhode Island, if you own a restaurant you will also have to factor in a local sales tax on meals and/or an excise tax on hotels or other types of lodging.
If you are planning on having any employees when you start your business, you will need to have a payroll system set up. The payroll system would allow you to collect w-4’s and new hire forms for your new employees and ensure that you are withholding the proper taxes for them; they would also be responsible for sending out w-2’s at the end of the year so your employees can file their income taxes. Many businesses will choose to outsource their payroll, as many business owners find it challenging to afford the costs of payroll programs, security programs, stay updated on the latest regulations and calculate what and how much to take out.
Along with a payroll system, your business would not be able to operate properly without an accounting system. It is critical for a healthy business to be aware of the revenue your business is collecting compared with the expenses of the business’s operations. Along with recording cash flows, you will also be responsible for sales tax payments (if your business is listed as one that needs to pay sales tax), tracking credit card payments processed, bank reconciliations, and creating financial statements such as your balance sheet, general ledger report, and monthly operating statements (profit & loss statements).
Lastly, once you have determined the rest of your business necessities, you will need to apply for capital to start your business. There are more options today than before for small business owners, especially those in their first year of business. The usual route is to have an accountant work with you to create a detailed business plan with financial projections and an expense sheet to apply for a loan through a bank. You also now have the option of taking the business plan to venture capitalist investors, who are investors that will provide your business funding to start up, however, in exchange for their investment they will want to have ownership share and an active role in the company. Another option is using crowdfunding, which is a large number of crowd funders raise funding for your business; they do not receive a share of ownership or return on investment, but for a “gift” such as their name in credits, the product or service you’re selling, or meeting the owner.
There are a number of requirements and considerations needed to start a business. As a business owner, especially a first-time owner, it is best to find and utilize an experienced accounting firm that will be able to guide you in creating and establishing your business, while setting up your business for the federal and state. In the long-term, they can help you with reports and a business plan to receive funding and to help you manage your financial records after your business has started to keep your business operating efficiently for lasting success and future growth.
Source: Rhode Island Division of Taxation http://www.tax.ri.gov/help/faq.php