Starting a business without a business plan

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So, let's review some scenarios about how this tax consideration unfolds for both an "S" and a "C" corp.: Company loses money: you personally earn 50K/year from various sources (a job, stocks, etc.). Your company loses 10K in operating income. If you were a c-corp you personally pay taxes on 50K. The company has a "tax loss carry-forward" of 10K that it can deduct against any earnings it may have in the future. If were an S-corp you personally pay taxes on 40K (your normal 50K, minus the 10K loss). Company earns money: you personally earn 50K/year from various sources (a job, stocks, etc.).

If, however, the owner decides to keep money in the companysay, so it can buy more equipment, story pay expenses yet to come, prepay for advertising, or for general operationsthen we run into a problem: by having kept some money in the company, it now has. And, because the owner took some money for himself, he needs to pay taxes, too. The same money is taxed, but at different rates, depending on whether it's the company paying the tax, or the individual. If you thought that was complicated, consider how much more so it is when you factor in all sorts of other things, like real estate and other property and depreciation schedules. Things really get insane for those who have other income as well, such as pensions, dividends from stocks, capital gains from home sales, and all sorts of other accounting lingo that can make your head. Well, go to sleep. For so many reasons, the irs designed a special kind of corporation to simplify the whole thing as if it were one tax-paying entity. For individuals who own and run their own companies, but don't need or want the complicated overhead, they need: The "S" Corporation Here's how it works: whatever money an "S" corp. Earns or loses, it is declared on the shareholder's tax return. That individual prepares his tax return like he always did before, only he now has one more line-item: the profit or loss from the company. It's just as if he got a normal paycheck, or had other deductions.

starting a business without a business plan

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The lower the for amount earned, the lower the percentage of it that's paid in taxes. The higher the amount, the higher the percentage. Although the personal income tax rate is designed similarly to the corporate rate, the schedules are different. And that presents a problem for small companies at many levelsespecially for those companies where the owner is also the only employee. Since most photographers are usually like this, let's examine what happens. First, the simple case: if the owner takes all the profit out of the company for himself (so he can live the company itself pays no tax, because it has no profit. The owner, however, pays income tax on that money because, obviously, that's his personal income. For this simple case, the money is taxed as a single rate: the personal income tax rate for the owner of the company.

starting a business without a business plan

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The traditional C-corp, which is what most people are familiar with; the s-corp, which is used for "Small" paperless businesses owned by one person (or a small set of people and the llclimited liability company, which is kind of a hybrid between an "S" corporation and. Let's get into each of these as briefly as possible. (I know, you're getting woozy.) The "C" Corporation we'll start with the c-corp, because non-business people are most familiar with this one making it easier to establish the concepts. Most companies you know are c-corps: coke, gillette, mcDonalds, att, microsoft, and even Enron. even Enron?" you ask! I point this out because, although it is bankrupt, it hasn't changed its corporate status.) Briefly, in the c-corp, the company makes money and pays tax on it, less expenses it pays. As it happens with most companies, they pay their employees, and in so doing, this becomes one of its many expenses. After all expenses are paid, whatever money is left over from the revenue earned that year is profit from which taxes are paid. Those taxes are paid at the "corporate rate which is based on a sliding scale of income.

If your photography business is profitable, or if you don't plan on selling the business in the future, this may be the simplest form of business. There are caveats (listed later but if you are willing to live with them, and don't need the added protection of a corporation, then this may be your best option. Corporations: Three choices When you form a corporation, you assume a new paradigm for how you run your business. In essence, you have given birth to a new entity, at least in the irs's eyes. While they won't send you any congratulatory cards, your new child will be given a new social security number, otherwise known as the corporate tax. This is your hint that this new business is going to have a virtual life of its own. While you may have already picked a name for your new offspring, you also get to make a choice that you can't do with human babies: you get to choose its sex. In irs lingo, that's called the "tax status." And, thanks to creative legislators, you don't have only two to choose from, you now have three!

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starting a business without a business plan

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Important note here: The first mistake people make is about thinking that there is a single "correct" way to establish your business type or file tax returns, and there isn't. There are many ways to do this correctlywhich method you choose should be the one that is most advantageous to you based on your particular circumstances. Some people are better off incorporating because of personal details, not because one way is "better" or even "correct." Those details may involve how you financed your company, whether you have an angry ex-spouse, or if you want to prevent your evil step-children from inheriting. Unmarried hobbyists who spend most of their time in caves may do just fine filing as an individual using a schedule. There are pros and cons to each choice. Lastly, the type of business entity you choose has legal and tax consequences, as will be discussed.

Let me re-emphasize that there is no "correct" way, so you should not follow the advice of single-solution individuals who may say "all photographers should be sole-proprietors." Regardless of whatever decision you make, you will get in trouble if you don't know exactly why you've. Accordingly, when you're done with this, if you still have questions for your tax preparer, you should not be asking "what" you should do, but instead, ask, "what are the advantages of choosing method x over method Y?" Sole Proprietor Most freelance photographers typically consider. Anyone, doing any kind of business, can be a sole Proprietor, including bookkeepers, construction contractors, videographers, journalists, independent cooks, contractors, or web designers. One can even form a partnership with one or more people and still maintain Sole Proprietorship status on his personal tax returns. However, such relationships are better managed through another vehicle, the limited liability corporation, which is discussed later. The sole Proprietor method is preferred mostly because it surprise has the lowest administrative overhead, and the tax filings are not much different procedurally from how individuals normally do them.

So, the first decision you need to make is, which one of these are you? The main risk with having a photography business is having the irs determine that it is really just a hobby. That is, many people spend a lot of money on photography, call it a business, and offset expenses against their otherwise taxable income. So, if you're losing money in your photo business, you have a lot more to worry about than just the fact that you have less. The irs might want to come and take more in the form of penalties, back taxes and interest on the taxes you should have been paying against your other income.

Yes, you may be stunned to learn that there are actually people out there, living it up on vacations and fancy dinners, not really taking pictures, but writing off all those costs as "business expenses" (wink, wink!). This all serves as another reminder that forming a business requires a concerted and intentional effort to take it seriously, and while that may be vague and/or ambiguous at times, especially in the beginning, the business is perceived to be more legitimate when you follow. I will cover many of them here, but you are encouraged to do additional research, since there are state-by-state laws that you may need to know. A great resource for more information (which include necessary forms for filing a corporate papers and tax election status see books on Incorporating, published by nolo Press ( m ). All that said, you are certainly allowed to treat your photo hobby like a business and still not actually form a business entity. For example, if you're selling prints on ebay, then you can do this in your spare time and just file a schedule c with your normal tax returns. (This is the form that declares "other" income.) If you sell something that requires "sales tax you may need to do a few things with your state's local franchise tax board. But these don't necessarily require you to "start a business." Deciding your Business Type Assuming you are not going to be a fulltime employee of another company, and you are going to start your own business, pay taxes, pay yourself, and be responsible for the. Here, you have several choices: a sole Proprietor or one of the various types of a corporation.

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This does not change your tax obligations in any wayyou still pay taxes on income (and deduct expenses). It's just that this formality separates your business dealings from your personal ones. Consider Incorporating you might consider incorporating your business to further establish it as a separate entity. This is the most secure way of protecting yourself from the irs ruling your activities as a hobby, though it's not foolproof (since cheaters are known to use this method as well). Incorporation involves more paperwork and other administration overhead, but there are many other benefits to incorporation, which may include tax savings and legal paperless protections. So, there's a tradeoff, and although incorporating is not for everyone, it's worth looking into if you feel strongly about aggressively pursuing your business. So, myths aside, let's start the discussion with some preliminary framework. Are you a "Pro or just a hobbyist? Regardless of what you claim to be, the irs and other legal entities use different metrics to determine whether you're a bona fide business, or just an enthusiastic hobbyist, or possibly even a criminal trying to evade taxes by masquerading as a professional for the.

starting a business without a business plan

Again, it's all about patterns of behavior. Car receipts are always what people hate (and the irs loves). If you're going to deduct your car and its expenses, you business need to log mileage when you drive on business-related activities to demonstrate a correlation between expense activity and income activity. Filing the right tax returns, and doing them properly. When you collect your receipts for the year, and total up your income, you need to summarize all this to the irs. Depending on the type of business you have, you attach an appropriate schedule to your personal tax returns. Many photographers consider themselves "sole proprietors which requires filing a "Schedule C" along with tax returns.

deduct expenses is by both specific and ambiguous means. In general, the irs looks for the following: Receipts. This almost goes without saying, but it's important to know that it's not just having receipts that matter. They look for patterns of behavior. Are you consistent in what you deduct? Are you thorough in your accounting? Is there a consistent correlation between the kind of things you deduct and the kind of income you declare? For example, if you're deducting expenses associated with trips to hawaii, but your "photo-related income" is only from wedding assignments in your home town of Tulsa, oklahoma, the irs might send some people over to ask you a few questions. Separate personal and business expenses and activities.

The only thing that really matters is how you intend to have your income and expenses affect your tax returns. And that's where the irs comes. The agency has only one interest: whether you are properly paying (or not paying) your taxes. Irs and other legal entities use certain metrics to determine whether you're a bona fide business, or just an enthusiastic hobbyist, or possibly even a criminal trying to evade taxes. Assuming you're not a criminal, the greatest concern you should have about the irs is that it determines that you only have a hobby, not a business. Difficult as it may be to believe, there homework are those who spend a lot of money on photography, call it a business, and use their expenses as deductions against other income. There's nothing wrong with having a photography business while you have other income, the irs just wants to make sure you're not lying about your motives and inappropriately deducting expenses that are not business-related.

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Click to recommend this page: Introduction, however you envision your future in photography, if you're going to make money dissertation at it, you're likely to start your own business. That's right, you're going to be an independent entrepreneur, where you set your own hours, are your own boss, and watch tv late into the night as you clip your toenails. And if you thought that was fun, just wait, because now comes the fun part: doing your taxes, writing contracts, collecting money from clients, paying your bills, and dealing with attorneys (yours and others). The good news is that I'm not going to get into any of that here. Volumes have been written on the subject, and it's beyond the scope of this book. However, where i can be of service is to help you understand the principles behind these aspects of the business in order to clear up common misunderstandings and put you on the right track for talking to your accountant. On the bright side, this isn't all that hard. Running a business is sort of like riding a bike: once you learn, you wonder what the fuss was about. De-, myth -ifying the Photo business, first things first: despite many internet rumors, you do not need a permit or license of any kind to qualify as a "professional photographer." Selling photographs or photography services requires nothing more than your desire to.

starting a business without a business plan
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