So, why in the world would I be talking about flying in combat in a multi-aircraft formation when I should be talking about business? Whether you know it or not, as a business person you are in a type of combat, because you are in stiff competition with others, everyone competing for the same customers and dollars. A recent article in the Wall Street Journal, “With Lobster Prices Low, Things Get Ugly in Maine,” by Simmi Aujla, points out the hazards of competition. Lobster prices are so low the fishermen are actually fighting one another. This is certainly an extreme situation, but we in small business are fighting for our survival, against our competition while dealing with a myriad of other factors. For example, we fight on a daily basis to keep up with local, state and federal regulations. So why are you going it alone? Just like fighters going off to combat, you need to arm yourself with a team of advisors. A good team of advisors can be “checking your six”, so to speak, and keeping you and your business out of trouble.

How do you go about forming a team of advisors and how should you use them? Each business and business owner is unique. The first thing you should do is assess your strengths and weaknesses and in any area you rate yourself as weak or even average, I would consider having an advisor.

What kind of advisor should you look for? You should look for a professional who has experience in small business and is at least familiar with your business.

I assume you are an expert at what you do or you would not be in your business. But perhaps you have decided to branch off into a new field. In that case I would definitely find someone, in the same field, who is not a direct competitor, to use as a resource. Pick that person’s brain to find out as much as you can about your business.

If you are strong in recordkeeping and enjoy doing it, that’s great. If not, bring a bookkeeper on board to do your bookkeeping for you, review your books periodically or, if not that, at least be available to give you advice how your books should be set up and kept. Good bookkeeping is critical to a successful business. Why would you want to cut yourself short here?

The same thing goes for taxes. Perhaps you have been operating your business long enough to know what you need to file and how to plan for your taxes, but if this is an area of weakness, bring a tax professional on your team to be there when you have a question. A tax professional experienced in small business can provide invaluable advice. For example, are you in the right business entity? Are you doing proper tax planning? Are you taking all the deductions you can legally take and does the business entity you have chosen help to minimize your taxes? You may be surprised what you learn.

If you are in a business that requires capital, get to know a banker or other source of capital. Even if your business does not require a lot of capital, you need to make sure you have a line of credit, a credit card or some other source of money to get you through the low income, high expense periods.

What about your E&O or similar insurance. Do you have someone you can call to give you straight forward advice and who will shop around for the best price for you?

The same thing could be said for: Marketing, legal, website development, retirement plans and other benefits for you and your employees.

Speaking of employees, that brings up one final consideration. Dealing with payroll is complicated and can get you in a lot of trouble with both the state and IRS if not done properly. (see my article, “So Far, So Good” http://biznik.com/articles/so-far-so-good ) Don’t be afraid of payroll. My advice, hire a professional to do your payroll for you or at least to get you set up properly. This could be your bookkeeper or a professional payroll service. If you do it yourself, make sure you know what you are doing and/or follow the advice of the advisor to the letter. Remember, if you are a Subchapter S Corporation, you are an employee of the Corporation and must pay yourself a reasonable salary, assuming you are making a profit in the business.

I could go on and on, but I think you get the picture.

Take a few minutes and do a self assessment. Try to think of everything you need to do to make your business successful, including the not-so-fun stuff like bookkeeping and taxes. Look at your list to see where you have rated yourself as weak or average, then try to think of someone you could call on as a resource in that area. Perhaps it’s a friend, perhaps an acquaintance or someone you have met through Biznik.

You will use some of your advisors more frequently than others. In those areas where you know you need help and will need frequent advice and assistance, consider an arrangement where you negotiate with the professional to pay an hourly rate, an annual amount for continuous advice, or hire that person to do everything and get their advice with it. For example, if you hire me to do your taxes, you get my advice free for the year. If you don’t want me to do your taxes, you could hire me for an annual fee or pay me by the hour. There are lots of choices. Remember, you get what you pay for, so if you want advice from an expert, expect to pay for it.

Depending on your business, you could also have your team of advisors set up so that you can refer a client to them if he/she needs that type of professional advice or service. It’s great when a group of professionals refers clients to one another. Clients who trust you will tend to take your referral.

Fly safe, your team of advisors has your six!

 Federal taxes: income and self employment taxes

          Impact on personal income tax.  When you own and operate your own business, in almost all cases [the exception is a C Corporation], the income or (loss) from the business passes through to your individual income tax return (Form 1040).  Business income increases the total taxable income on your individual income tax return while, in most cases, a loss will offset other income, or, if the loss exceeds your income for the year, it can create a Net Operating Loss which can then be carried back or held for future years and used to offset income in those years.

Assuming your business is making a profit (that’s everyone’s objective, right), I highly recommend you do some tax planning and determine your estimated taxes you need to pay the IRS throughout the year.  The IRS expects you to pay taxes as you earn the income.  This is done either through withholding taxes or by paying estimated taxes.  If you don’t pay as you earn and end up owing money when you file, the IRS will penalize you.

For those of you still working for someone else, you are paid a salary or wages and receive a W-2 at the end of the year.  Through that process, you have Social Security, Medicare and income taxes withheld from your pay each pay period.  The company matches the amount of social security and Medicare withheld from your wages.  Combining what is withheld from your paycheck with the company matching, the total amount paid to the IRS is 15.3% of your taxable wages [there is a threshold on Social Security taxes that changes each year].  If, when you are working for someone else, you have had enough income taxes withheld then you will owe no additional taxes when you file your tax return.

          Impact of being self-employed:  As a self-employed business person, you have just become the employee and the employer for the purposes of paying your payroll (self-employment) taxes.  Even though, in most cases, you do not pay yourself wages or issue a W-2, you still must pay the same Social Security, Medicare and income taxes you would if you were working for someone else.  These taxes for the self-employed are called Self Employment Taxes, surprise, surprise.  As a self employed business person you must pay both halves of Social Security and Medicare taxes; the full 15.3% on the net income of the business.  That is paid when you file your individual income tax return, Form 1040, and is in addition to whatever income taxes you owe. 

So, for your tax planning, you must take into consideration what your total income tax will be for the year, based on your projected business income and other income you receive, minus the various deductions you are allowed.  As a self employed business owner, there is a new deduction you can take; ½ of the Social Security and Medicare taxes you pay can be taken as an above the line deduction in the Adjustments portion of your Form 1040.  To your income taxes you project you will owe, you need to add Social Security and Medicare (that 15.3% I just talked about) to determine your total tax liability.  Assuming your income is earned evenly during the year and also assuming you are not having taxes withheld by an employer, you will divide your tax liability by 4 and pay estimated taxes each quarter.  Estimated taxes are due April 15^th, June 15^th, Sept 15^th and Jan 15^th of the following year.  You will use Form 1040-ES to pay your estimated taxes.

If you are working for someone else while you start your business, not a bad idea, by the way, you need to account for the income taxes withheld from your salary or wages to determine what you should be paying in estimated taxes. 

I highly recommend you set up a second business bank account, or use the savings account portion of the account you already have open to set aside money for tax payments.  Your tax planning will tell you what percentage of your business income should be set aside for income and self-employment taxes.  Do not take the money out of the account until all taxes are paid.  Remember, you will not know the full impact of taxes until you file your annual tax returns in the following year. 

In a future blog I will discuss payroll taxes when you have employees.

                        I love doing what everyone else hates to do