Monday, November 30, 2009

Record Keeping

Self Employment Blog #4

Important details #1

Record Keeping

The IRS requires that you keep accurate records of your income and expenses. Unfortunately, they don’t tell you how to do it. You want to establish a system that is simple, accurate, and easy to maintain. It can be a paper system or computerized, whatever works best for you. It is important to do your record keeping regularly. Do it at every week or at least every month. The goal of record keeping is to collect information together into the categories of income and expenses to determine your net income.

Do not throw your receipts under the seat of your car, in the basket on your counter top, or in a box under your bed. Do not take a big box of receipts to your CPA to prepare your return. Be organized. You need to know how you are doing as the year progresses, but you can also save yourself a lot of money in tax preparation fees when you come prepared.

One of the simplest systems on the market is the Dome Bookkeeping system. You can buy it at most office supply stores. It is a paper and pencil system and is smaller than a crossword puzzle book. With this system you record your income and expenses as they are incurred. So when you make a sale today, write it down. When you pay a bill, write it down. At the end of the month you summarize your expenses by category and tally up your year to date activity. At the end of the year you hand the book to your CPA to have your taxes prepared. Quick, simple, accurate, cheap, and it saves you money with your accountant.

Another paper system is called a One-Write System. You buy checks and a check register from a company like Deluxe ( A check register is created at the same time you write checks and makes a permanent record of each transaction. It also keeps your checkbook in balance. The check register has columns to “spread” your expenses. So every time you buy office supplies, you put the amount paid in the office supply column. At the end of the month you tally up the sheets. At the end of the year you summarize your activity for the full year to prepare your tax return.

You can use Excel or another spreadsheet program to collect your records. This would be set up like the One Write Systems mentioned. It can get very cumbersome if you have a lot of transactions. A power-user could come up with a higher-tech solution to doing the summary.

Quicken ( or a similar personal finance program can do a good job of collecting the information together for you. It forces you to select a category and then prints reports telling you how the business is doing. You write your checks through the system and can then track what is owed to you. You should set up a data file for the business that is separate from your personal data file to reduce the confusion. These programs are fairly simple and accurate, and reconciling your checkbook is a breeze after the first month.

QuickBooks ( is the premier small business bookkeeping program and it is related to Quicken. It can handle sophisticated business transactions and complex companies. The key to QuickBooks is to not over-think it. Use it to track your receivables, keep your checkbook balanced, and write your checks.

A one person sole proprietorship or LLC can generally keep good records with Quicken or Money (from Microsoft). QuickBooks is appropriate if you have a lot of clients you are billing or have a more complex business. If you are incorporated, QuickBooks or some similar program is the best choice. Excel is cumbersome, and the paper systems will become tedious.

Just remember to keep it simple.

The next blog will cover the tax implications you will face.

Wednesday, November 25, 2009

Corporations, LLCs, and Sole Proprietorships

Self Employment Blog #3

Corporations, LLCs, and Sole Proprietorships


Incorporating your business requires filing long and formal documents with the Secretary of State and the spending of a lot of money on filing fees, legal fees, accounting fees, insurance, etc. just to set up the corporation. Then you have to pay $4,000 annually in various expenses just to keep the corporation alive.

The major benefit of a corporation is to limit your liability in case something bad happens. All your business assets are on the line if the business is successfully sued, and you could be put out of business. However, the corporate structure should protect your personal assets from being seized in a judgment. I only know of one of my clients who was successfully sued and that was because they neglected to deal with a complaint.

There is a marketing benefit to being incorporated. You appear to be bigger than you are. With today’s technology, you can look like a big company with vast resources, when in fact you are one person sitting in your spare bedroom. Appearance of size matters. Unfortunately, some big companies will not deal with you unless you are incorporated.

Finally, there can be a tax benefit to being incorporated. You need to be earning a significant income to take advantage of these opportunities. My rule of thumb is the benefits start to be available when you are earning over $50,000 per year and you break even when you reach $100,000. If you are losing money, a corporation just costs you more money.

To accomplish this you must observe all the niceties of having a business. You will need a separate business checking account in the business name. You should always use business stationery in the company name and sign as president, not just your name. Everything you do for business should be in the Corporation’s name.

Limited Liability Company (LLC).

Like a corporation, you are required to register your LLC with the Secretary of State and pay a filing fee. The fee varies by state. The registration process is easy and generally just a one page form. Then you have to keep the LLC alive by filing an annual report each year. There is of course another filing fee for the annual report.

There are two benefits to an LLC. First, it limits any liability that arises within the business from affecting your personal assets. For example, you start a business painting houses. The first house you paint catches fire and burns to the ground. An LLC will hopefully protect you from losing your house and other assets.

There is more good news about the LLC. If you are the only member you do not need to file a separate tax return for the LLC. The income and expenses of the business go on Schedule C of your personal 1040 tax return. It is also less expensive to run because you are not paying a tax preparer to prepare an LLC return and your personal return.

An LLC has the same marketing benefits as a Corporation but none of the tax benefits.

Like the corporation, you need to be careful to transact all business in the LLC’s name.

Finally there is the sole proprietorship.

Essentially when you stand in the middle of your living room and declare yourself a business you have become a sole proprietor. The niceties of the LLC or corporation do not have to be observed. You can run the business through your personal checking account. You do not have to register with the Secretary of State. You do your work, collect your invoices (hopefully), pay your bills, and keep the rest of the money. At the end of the year, your business activity is reported on Schedule C of your 1040 Form.

The plus side... It is simple to start and close a sole proprietorship. You end it by standing in the middle of your living room and saying, “I’m out of business!” Your record keeping requirements are much simpler. (Record keeping will be explained later.) The cost to stay in business is much lower than a corporation or LLC.

The downside... If something goes wrong, all your personal assets are on the line. They can take your house and all your assets. A homestead exemption will help protect your home. Under federal law, retirement assets are generally not available to creditors.

More bad news… Many large companies will not deal with you as a sole proprietor.

The next blogs will cover the details of business ownership.

Sunday, November 22, 2009

Franchising and Multi-Level Marketing

Self Employment blog #2

These are two quick ways to get into your own business.

Franchises: One option for starting your own business is to buy a franchise. This can be a great way to get a business going and, if you get the right one, it can be a great financial boon. The big benefit of a good franchise is that all the set up work and on the job training has been taken care of. A good franchise will give you great training in their proven system of doing things and then help and monitor you as things progress. They will help with a location and get you going. If you do it their way you are almost guaranteed to succeed. One problem is that the franchises you can afford are the ones who don’t do any of these things. They take your money, mail you a Xeroxed copy of their manual and say “Where’s my royalty check?” There are exceptions of course but generally you need the big bucks to get a good franchise.

Multi-Level Marketing: This type of business is also called Network Marketing. Here is Wikipedia’s definition of MLM:

The basics of MLM are fairly simple. MLMs are usually centered on a consumer product. The product is always top quality (according to the company) and more expensive than similar products you can buy at your local store. You are recruited to be a distributor of this product by someone who is already in the business. This might be a friend or colleague. You are encouraged to sell the product and to recruit distributors. You earn money on your own sales and a commission on the sales of the people you recruit and those that they recruit, ad infinitum. This organization is called your “downline”. The more people in your downline, the more you earn.

MLMS are generally inexpensive to enter. They also entail much more work than you are led to believe. The success rate in this type of business is no better than starting any other small business and is probably much smaller. You can be fabulously successful but that is a rarity. Most participants plod along and then drop out. My observation is that companies in MLM pop up, are very popular, and then settle into a maintenance mode. Then someone decides that you can MLM dog biscuits and folks jump on this bandwagon. I have had some clients who have generated some income from this business model but most have dropped out within a year of joining. For an MLM to work, everyone needs to sell product as well as recruit more people to sell. Setting up a wholesale club by recruiting distributors and using the products but not selling will not work.

Next time, I will discuss corporations, LLCs, and sole proprietorships.

Wednesday, November 18, 2009

Starting Your Own Business

This is the first blog in a series about starting your own business.

Many people dream of being in business for themselves. They think about the financial rewards, the independence of being their own boss, and the freedom you get when you do not have to answer to someone else. It all sounds wonderful. Doesn’t it?

Let me fill you in on an alternate reality.

We all know the urban legend about Bill Gates. He dropped out of Harvard to start Microsoft. He worked hard, made some good decisions, (except Vista of course) and is now the richest man in the universe. Well, that rarely happens. The financial fact of small business is that 80% fail. Most of the remaining 20% struggle to get by and a rare few end up with the big bucks.

It is true that you are your own boss (except maybe for your spouse, clients, and employees). The (big or small) buck stops at your desk. That means that when something goes wrong, you also do not have anyone to pin the blame on. All the decisions rest on your shoulders and you can’t ask for advice from your friend in the next cubicle. It can be very lonely having your own business.

You now have the freedom of working all day and then doing estimates, billing, record keeping in the evening. Oh and don’t forget those phone calls you need to make and the supplies you need to pick up. Oh and paid vacation. Who are you kidding? When you go on vacation, there is no one back at the shop to earn money for you.

We are going to explore the world of options you have for starting your own business. To end this section, I want to share some definitions with you, which will be expounded on in subsequent blogs:

Break Even – This is the point where the revenue from your work equals the expenses to accomplish that work.

Contractor – This is a person who is working for your company and does not have any taxes withheld from their pay.

Corporation – A well-established form of business with shareholders, stock, and well-defined limits of liability and operating characteristics. It is a separate organization and must file its own tax return.

Employee – This is someone who works for you and has taxes withheld from their pay and receives whatever benefits your company offers.

Franchising – A quick way to get into business. You pay to be part of a large company with established policies procedures. Dunkin Donuts and MacDonalds are well known franchises.

Homestead Exemption – A document you can file at the registry of deeds that protects you from being forced to sell your home to satisfy creditors. Consult a lawyer for more specifics.

Limited Liability Company (LLC) – A form of business that provides some protection from liability. An LLC may or may not file its own tax return.

Liability – In this context, liability is defined as having a business problem spill over into your personal life and assets.

Limiting Liability – This means keeping your personal assets safe from business problems. The idea is that if the business gets sued, you get to keep your house and personal checking account.

Multi-Level Marketing – Another quick way to get into business. MLM is almost always selling consumer goods. You are compensated for your own sales and earn a commission on the sales of people you recruit into the business.

Self-Employed Individual – That would be you. This is a person who runs their own business and takes on the risks associated with it. Even if you have only one client you are still self-employed. You must run the business, do the work, pay the bills, collect the money, and pay your own taxes.

My next blog will discuss Franchising and Multi-Level Marketing.

Saturday, November 7, 2009

New Homeowner’s Tax Credit – Part Trois

Well, well, well. The federal government has extended the new homeowner's tax credit to cover purchases that close on or before June 30, 2010. They have also added another important date--you must sign the contract to purchase the home by April 30, 2010. I guess a little more of the stimulus money will be going to everyday people.

The Feds have also changed the rules a bit. You still must have not owned a home for at least three years to qualify for the full $8,000 new homeowner's tax credit. However, the amount of income you can have to qualify for the full credit was raised to $125,000 if you are single, and $225,000 if you are married and file a joint return.

They also added a new wrinkle. If you have owned a home for five of the previous eight years you can qualify for a credit of up to $6,500. This expands the pool of potential house buyers substantially.

Now for the bad news. The new homeowner's tax credit is not retroactive. The new rules are effective for sales that happened on or after November 6, 2009. All those folks who have owned a home for more than five years and closed on their new home on November 5, 2009 are out $6,500. The same goes for buyers who exceeded the income limits and thus did not qualify for the new homeowner's tax credit earlier in 2009.