A: No. A DBA Certificate allows you to operate under an assumed name. Essentially, you and your business are the same entity. If someone sues your business, you could lose your personal assets, too. To protect your personal assets, I would advise you to incorporate your business as a Limited Liability Corporation (LLC). If there are several owners, consider a Limited Liability Partnership (LLP). As an LLC or LLP, you and your business are separate legal entities which can help limit your exposure in the case of a loss. Any loss you face is limited to what the business owns. For taxation purposes, an LLC or LLP is considered a “pass through” entity, meaning the business does not pay taxes. Instead, earnings “pass through” the business onto your personal tax return and are taxed at your regular tax rate. You can also form an S-Corporation. Like an LLC and LLP, an S-Corp is also a separate legal entity. One key difference is that in an S-Corp, the business pays taxes on earning and the owner pays taxes on distribution. Yes, that’s double taxation! The benefit of an S-Corp is that it can have any number of owners, whereas an LLC is limited to 100. There are other requirements for S-Corporations. If you are interested in this formation – call me; we should chat!
Q: I won’t have many start up costs if I’m offering a service, right? I don’t need a budget.
A: Even in a service organization, you will spend money to get your business up and running. Having a realistic expectation of startup costs can be the difference between success and failure. Whether selling a service or product, some costs I want you to be aware of are incorporation cost, website hosting, ordering system, advertising, insurance, equipment (like laptops and phones) and IT support/security. Unfortunately, many business owners only think how much money it will take to “open the doors”. You also need to think about what it will take to keep the doors open while you are building your client base (and growing your revenue). While you’re thinking about costs, I recommend you make a monthly budget. As a business owner, you need to know exactly how much you need to sale to cover fixed costs (your break-even point). Any sales beyond this point add to the bottom line. If your sales are below this point, the business is operating at a loss. Trust me, you don’t want to find out after the fact that you’re losing money!
Q: Do I really need financial statements? I have money in the bank so I must be doing well.
A: Cash in the bank only tells a small (and often misleading) part of the story. For example, if your Income Statement is showing high interest expense or if there is a high debt-to-equity ratio on your Balance Sheet, then you may not be using your cash to your advantage. Depending on your industry, there are many different financial metrics which will give you better insight into your business. You need to know which numbers are important to your business, but more importantly you need to understand what the numbers mean. Utilize your financial statements to make strategic business decisions. At a minimum, I would suggest every business owner produce an Income Statement, Balance Sheet, Budget to Actual Variance and Statement of Cash Flows. If you are selling a product, also keep an eye on your inventory turnover rate. If your clients pay you over time, watch your accounts receivable aging. In my next blog, I will break down each of these reports (and other key financial metrics)!
Don’t feel overwhelmed if this feels like an information overload! If you ever need help, just call your CPA!