Tag: Tiny Business

Posted on by Jan Roberg

Top 5 Reasons Your Tiny Business May Not Be Doing As Well As It Could Be

Take care of your business

                                         If you don’t take care of your tiny business, it’s like flushing money down the toilet.

The government defines small businesses as companies making less than $7 million a year or having fewer than 500 employees.  The companies I work with generally have three or fewer employees and only dream about seven million dollar revenues.  I call these “tiny” businesses.

 

As tiny businesses, we’re generally ignored by the government.  When you hear something in the news about Congress passing legislation to “help” small business owners—they don’t mean us.  That’s okay with me.  We tiny businesses can get into enough trouble all by ourselves.  Here are my top 5 picks for tiny business problems.

 

1.  Not working around Roadblocks.   Every tiny business has roadblocks; you need a license, or special training or there’s a law change.  No matter what type of business you have, there will be roadblocks.   The successful tiny business finds a way to work through or around them.

 

True story:  There was a small business owner who was basically ready with her business; the only thing left was to get her web-site up.   She had asked me for some help.   Mind you, the only thing stopping her business from getting off the ground (at least as she explained it to me) was her website.  I gave her names of people who could make her website for a fee and  I also gave her free website resources as budget was an issue for her.

 

Six months later we met again.  She still didn’t have a website.  The work was stalled because she couldn’t find the “right” art for it.  She wanted a picture of a compass.   She had hired a high school kid to draw it for her for free.  He wasn’t done yet.  Okay—go to Google images, type in compass and you get hundreds of pictures.  Granted, she’d probably have to pay to use one of those pictures but her “free artist” hadn’t gotten the work done in six months.

 

And letting a high school kid that you’re not even paying be the reason your business hasn’t gotten off the ground?  That’s ridiculous.  Now in fairness, the compass idea was a cool idea and it tied to her business theme.  But—it wasn’t necessary to her business.  She could have already been up and running for 6 months while waiting for this art that she wanted so badly.

 

Sometimes, we’re our own worst enemies.  If you’ve got a roadblock that’s holding your business back get a second opinion.  There’s usually more than one way to skin a cat.

 

2.  Not knowing who your customers are. If you own a business you’re selling something.   The tough question is who’s going to buy it?

 

I once knew a woman who had started a business making bows.  She had made hundreds of bows, invested in a bow making machine and lots of expensive ribbons.  She hadn’t sold a single one.  She really liked making bows so that was what she was doing with her time, but she hadn’t figured out who would buy them.  At that point, that wasn’t really a business it was just a hobby. You have to have customers, someone willing to pay for what you’re selling to be a real business.

 

3.  Partner problems.  Recently I was asked, “Why do you hate partnerships?”  It was a fair question, I was being pretty negative.  The truth is, I don’t hate partnerships, I’ve just had to dissolve too many of them.  Partnerships get started because two or more friends decide they want to go into business together.  Good friends (or spouses) do not always make good business partners.  If there is a disagreement—how do you settle it?

 

I recently sat down with a couple that had a pretty good business plan and they seemed to be a good choice for a partnership.  But I was asking a lot of questions and I’m glad I did.  It seemed that Adam and Eve each had two income streams that they were thinking about for the partnership—sales of widgets and sales of thingamajigs.  Adam was going to cut back on his widget sales to pursue the thingamajig sales full time in the partnership.  Eve couldn’t sell thingamajigs she was just going to help Adam with that and in the meantime she would still sell widgets.  It all sounded like a good plan.

 

Except:  Widget sales was technically another job.  The money Eve earned selling widgets was outside the partnership—just as Adam’s widget sales were outside the partnership.  Adam was counting on Eve’s widget income to help support him because he knew that the thingamajig income wouldn’t be enough to support him during the first year.  Eve was hoping the thingamajig income would supplement her widget income; she wasn’t planning on turning over half of her widget income to Adam.

 

The bright side to this scenario is that they were thinking and talking before they made the partnership.  They hit a roadblock, yes, but they’re smart and will work around it somehow.  Too often I see partners who went into business together and later wind up fighting because they didn’t spell out their expectations up front.

 

4.  You gotta work at your business—I can’t tell you how many times people have come to me because they bought a business or invested in a business that required no work—and they lost their money.  If it sounds too good to be true, it probably is.  And if you’re picking a business, do something you love to do—because you’re going to be at it a lot.

 

5.  Not planning for your taxes—This wouldn’t really be a tax blog if I didn’t mention taxes now would it?  The whole idea about owning a business is that you want to be profitable.  If you’re making a profit, then there are going to be taxes.  If your small business is making enough money to support you and your family then you know you’ve got self-employment taxes to pay.

 

Screwing up one year—that happens.  Screwing up two years—you need to be more careful.  But if you screw up and don’t make your estimated tax payments after you’ve been profitable and owed tax money for three years in a row—you’re asking for trouble.  Our business cards say, “If you don’t have a strategy for your taxes, you’re probably paying too much.”  Taxes take a huge chunk out of your earnings.  Don’t let IRS penalties and interest make matters worse.

Posted on by Jan Roberg

Small Business Basics

 

Deduct all of your legitimate business expenses

 

I’ve done a lot of posts about unusual small business deductions, but I haven’t done anything about the basics.  If you’re new to the small business world, that’s what you really need to know.  These are some of the basic, core facts that you need to know to prepare your small business taxes.

 

First, if you’re just starting out, and you haven’t filed any papers like articles of incorporation, and you don’t have any partners, then you’re considered to be a sole proprietor.  Your business tax return goes on a form called a Schedule C, and that’s part of your regular 1040 form.  Don’t file your personal taxes and then try to file your business return later, they’re one and the same thing.

 

What if I’m an LLC?  An LLC is a limited liability company, it’s not a corporation.  Most LLC’s will file as sole proprietors unless they have filed documents to be taxed as an S or C corporation.  (Then they file corporated tax form 1120S or 1120.)  LLCs that have partners will file partnership returns, form 1065.  This post is about sole proprietors who file Schedule C with their 1040 return.

 

A popular question I hear is, “How much money do I have to make to file a return?”  According to the IRS, if you make over $400 of self employment income, you are required to file a federal tax return.  This is very different from the minimum filing requirements of regular returns.  Once you’ve made over $400, that income is subject to self employment tax and the IRS is very keen on collecting your self employment tax.

 

Another common question is, “How will the IRS know that I’ve made over $400?”   The easiest way for the IRS to find out your income, assuming that you haven’t reported it yourself, is from forms 1099MISC.  Many companies hire people as contract labor and don’t withhold payroll taxes.  If you make over $600 from them, they are required by law to give you a form 1099MISC, showing how much they paid you.  A copy of that form also goes to the IRS.  That’s the most common way small businesses can get in trouble for underreporting their income.

 

Another way the IRS can find out that you’re not reporting your income is through your bank records.  Let’s say for example that all of your business transactions are for cash and you never receive a 1099MISC.  Although you wouldn’t get caught as quickly, let’s say you had an annual income of $20,000 from your all cash business.  Your spending would be out of line with your income and could trigger an audit.  A quick look at your bank statements would prove you weren’t reporting your income.  If you’re serious about starting a real business, do it right and have a plan for handling your taxes.  It will save you a lot of trouble in the future.

 

Small business income, unlike wage income, has one big disadvantage–it get’s taxed twice.  First, it’s taxed at your normal tax rate and then again at the self employment tax rate (15.3%.)  Let’s say you’re already in the 25% tax bracket for another job you have, your self employment income would then be taxed at 40% (the 25% plus the 15%.)

 

Small business income also has one big advantage–you can reduce your self employment income by any expenses you had acquiring that income.  You may even have more business expenses than you have income, in that case, you can use your business losses to reduce your regular income, that lowers your overall income tax bill.  Now you don’t want your business to be losing money every year (that’s not really good business practice.)  But when you’re starting up, being able to deduct your losses is very helpful.

 

So what kinds of expenses can you deduct?  The key phrase that the IRS uses is anything that is “regular and necessary” for the business.  A good guideline is right on the Schedule C form.  Here’s a link to it right here:  Schedule C.  Advertising, legal and professional fees, auto expenses, insurance, rent, repairs and maintenance, supplies, and office expenses.   Meals and entertainment are deducted at 50% of what you spend (since the idea is that you’d have to eat anyway.)

 

If this is your first time filing taxes for your small business.  I recommend getting a professional to help you.  Even if you have a knack for the paperwork, it really helps to have someone else go over the possibilities of what you can deduct and make sure that the big things like depreciation (if you have that) are handled correctly.  If you get started on the right track, it’s easier to stay that way.