Business
Basics
Presented by:
Maya K. L. Sims, CPA, MAF
Office @: Ahmed H. Zaki, CPA, PC
678-957-1913 (office)
Maya@ZakiCPA.com
Topics
 Entity
Types
 Payroll – Employees vs. Contractors
 Autonomy & Record Keeping
 Other Watch Items
 Resources
 Thank you
Entity Types
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Sole Proprietorship
Partnership
C-Corporation
S-Corporation
Limited Liability Company (LLC)
Two separate issues when making entity type
decision: Legal & Tax. They are related, but can
be totally separate issues.
Sole Proprietorship
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Basic Info:
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Tax Effect - All taxes are paid by the owner.
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EIN usually only required if you will have W-2 employees or subcontractors
requiring 1099s.
Tax reporting is simple as income and expenses are reported on Schedule C and
attached to the individual tax return Form 1040.
Losses may offset other active income - of a sole proprietorship that is actively &
materially participated in are also deductible against other active income on the
return, which is often very beneficial for new start up small businesses.
All net income is subject to self-employment tax (Social Security +
Medicare14.13% effectively 2013) and income taxes. Half of the selfemployment taxes are deductible in the calculation of AGI.
Advantages:
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There can only be 1 owner.
Usually require business license (Not applicable for single source subcontractors).
May require registration with State Superior Court (around $25 in many counties)
Simple
Losses may qualify to offset other active income.
Disadvantages:
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Usually the worst tax vantage for profitable companies/contractors.
Disregarded entity: Owner is liable for all legal and tax obligations of the
company
Partnership
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Basic Info:
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Tax Effect - All taxes are paid by the owner.
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EIN is required as partnerships have to file their own separate tax return Form 1065.
All partners are to be issued a Form K-1 from the partnership and the taxes are paid by the
individual partners on their personal tax returns.
Losses may offset other active income - of a sole proprietorship that is actively & materially
participated in are also deductible against other active income on the return, which is often very
beneficial for new start up small businesses.
All net income is subject to self-employment tax (Social Security + Medicare14.13% effectively
2013) and income taxes. Half of the self-employment taxes are deductible in the calculation of
AGI.
Advantages:
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There must be 2 or more owners.
Usually require business license (Not applicable for single source subcontractors).
Partnership Agreements are generally not legally required, but may be essential to ensure that
Partners fully understand how the work, operations, income, losses and equity are to be handled
especially in the case of incapacitation or death.
May require registration with State Superior Court (around $25 in many counties)
Simple - simplest multi-member entity form
Losses may qualify to offset other active income.
Disadvantages:
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Usually the worst tax vantage for profitable multi-member companies.
Disregarded entity: Owners are liable both jointly and separately for all legal and tax obligations
of the company.
C-Corporation
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Basic Info:
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Are formed by filing Articles of Incorporation with the Secretary of State and are given legal rights as a
separate autonomous entity from the shareholders that own them.
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Requires a business license
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Operating Agreements are essential and corporations must hold at minimum an annual shareholders
meetings that is documented with annual minutes.
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Legally require segregation of books, legal documents and taxes as an autonomous entity.
Tax Effect - Taxes on company income are paid by the corporation.
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EIN is required and must file Form 1120 annually.
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Losses and income are fully recognized at the corporate level.
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All distributions to owners/shareholders must be issued by way of compensation (subject to Medicare & Social
Security) or as dividends (subject to double taxation).
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Excessive accumulated earnings are subject to accumulated earnings tax. This tax was devised to prevent
corporations from holding to much of the earnings and not giving the shareholders their share of the profits.
Advantages:
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Corporations receive an exemptions for dividends received from a company that they own (from 70% - 80%)
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Officers are also allowed to participate in corporate benefits plans such as Health Savings Accounts,
Dependent Care Accounts, etc.
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Corporate tax rates are often less than individual tax rates
Disadvantages:
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All distributions to owners/shareholders must be issued by way of compensation (W-2 or as 1099-Misc
Contractors) subject to Medicare & Social Security and income tax or as dividends subject to double
taxation.
S-Corporation
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Basic Info:
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Are formed by filing Articles of Incorporation with the Secretary of State and are given legal rights as a separate
autonomous entity from the shareholders that own them. Additionally S-Corporations must file a special election
request with the IRS to be considered a Small Corporation (pass through entity) for tax purposes (form 2553).
Requires a business license
Operating Agreements are essential and corporations must hold at minimum an annual shareholders meetings
that is documented with annual minutes.
Legally require segregation of books, legal documents and taxes as an autonomous entity.
Tax Effect - All taxes are paid by the owner.
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EIN is required and must file Form 1120S annually.
All shareholders are to be issued a Form K-1 from the S-corporation and the taxes are paid by the individual
shareholders on their personal tax returns.
All money given to owners/shareholders must be issued by way of compensation (subject to Medicare & Social
Security) or can be given by way of a non-taxable distribution (similar to partnerships).
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Excessive accumulated earnings are subject to accumulated earnings tax. This tax was devised to prevent
corporations from holding to much of the earnings and not giving the shareholders their share of the profits.
Advantages:
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All shareholders who actively participate and provide any service to the company or on the company or on the
company’s behalf must be compensated as W-2 employees with compensation commensurate with their industry.
Avoids double taxation of C-Corporations
Allows the ability to control the amount of officer compensation subjected to Social Security and Medicare
Disadvantages:
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Officers are not allowed to participate in corporate benefit programs such as Health Savings Accounts,
Dependent Care Accounts, etc.
Corporate income subject to personal tax rate which may be more than the corporate tax rate.
Limited Liability Company (LLC)
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Basic Info – Rules may vary, but these are some general standards:
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Are formed by filing Articles of Incorporation with the Secretary of State and are given legal rights as a separate
autonomous entity from the members and managing members who own them.
Requires a business license
Operating Agreements are NOT required, but highly recommended. LLCs are considered to be a less formal
organizational type than Corporations and only require meeting minutes in cases where significant company
policies and procedures are being established or changed (not annually
Segregation of books is highly recommended and may be required based on tax elections made.
Owners are listed as: Members, Managers or Managing Members
All owners have equal voting rights regardless of equity.
Tax Effect – No tax method assigned.
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LLC’s must elect the tax methodology they wish to be subject to or one will be assigned
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Advantages:
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Single member, disregarded entity: Default for LLCs with only one member. Same tax effect as a Sole Proprietorship, but with the Legal
protection of a corporation.
Partnership – must have 2 or more members: Default for LLCs with two or more members. Same tax effect as a Partnership, but with the
Legal protection of a corporation
Corporation – Election must be made using form 8832
S-Corporation – Election must be made for corporate states on form 8832 and an additional election for Small Corporation election
made using form 2553.
Flexible taxing method
Has same legal protection as a corporation (S or C)
Less formal organizational structure than corporations
Disadvantages:
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All members have equal voting rights
If tax elections are not taken timely they may be delayed costing additional taxes in the current year
Payroll
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If you hire employees or officers are required to be on payroll if company took an Selection
Employees vs. Independent Contractors: Not knowing the difference could cost you!!!
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Company ID Numbers
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http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-ContractorSelf-Employed-or-Employee
Who has control?
Who sets and how are hours set?
Who provides tools?
Is this project work?
EIN - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-EmployerIdentification-Number-(EIN)-Online
GA Withholding ID - https://gtc.dor.ga.gov/_/#2
GA Unemployment tax ID - http://www.dol.state.ga.us/pdf/forms/dol1a.pdf
With regards to the state, do not apply for your ID’s until you are sure you will be running
payroll.
Governmental Agencies Involved and the forms they require:
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IRS
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GA Dept. of Revenue
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Form CRF002, G-7, G-1003/W-2s
GA Dept. of Labor
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Form SS-4, Form 941, Form 940, Form W-2/W-3, Form W-4, Form
Form DOL-A1, DOL-4N
Employees Fill Out for you to retain on file
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W-4, I-9, G-4
W-9 (subcontractors ONLY!!!)
Autonomy & Record Keeping
 Keeping
detailed notes when making
major decisions or setting policies and
procedures.
 DO NOT comingle funds
 Establish separate Checking and Credit
Card Accounts
 Automate your accounting records
Bank & Credit Card Accounts
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I always recommend that a separate dedicated checking
account and credit cards (if you use them) are set up even
if it is set up as a DBA. This helps with accounting and
tracking and making sure that business transactions are
kept separate from personal transactions.
When you automate most banks have online banking and
many have integration tools to download transactions
directly from your bank reducing data entry time by up to
60%+.
What you may need to set up checking account:
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Incorporation documents (Corporations) or Organization
documents (LLC)
EIN
Business License
Advantages of Debit Card over Checks
Pitfalls of Co-mingling funds
Automate Your Accounting Records
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Work Smarter not Harder!
Reduces data entry
Makes reviews and projections easier
Produces Income Statement and Balance sheet for
year end tax reporting
QuickBooks – Basic or Pro
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Free courses through public library. Gwinnett County
Library: http://education.gale.com/llawr54429/SearchResults.aspx?CurrPage=2&Categor
yId=3&Sort=RELEVANCE&PrevSort=RELEVANCE&SortA
sc=True
QuickBooks Online - (www.quickbooksonline.com)
Payroll - http://payroll.intuit.com/
Other Watch Items
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Automobile Deductions –
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You have to track mileage No Matter What
Standard mileage deduction
Actual expense deduction
Meals & Entertainment
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50% deductible
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Exclusively and regularly as your principal place of business, as a principal
meeting place, as storage, for rental use, or as a daycare facility.
Insurance
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Fixed Assets
Business Use of Home
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Keep your receipts – Date, Costs, Name of client/colleague/business
nature of meeting
Depreciation / 179 Deductions
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Exception – Meals for employees for continuation of the work-100%
deductible
Health, HSA’s, Group Medical, Disability
Filing Deadlines & Penalties
Auto Deductions
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Auto Deduction & Mileage
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Parking & Tolls
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Actual Exp
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Take annual business miles divided by total annual miles driven to get
percentage of business use. Percentage is applied to expenses to
determine deductible portion
Purchase price of auto and date placed in service is used to deprecate the
vehicle. Depr. Is also subject to business use percentage.
Limits on depreciation for luxury vehicles
$25,000 in Section 179 deduction available on Autos over 6,000 lbs. loaded
Standard Mileage Deduction
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Actual parking for business trips is generally 100% deductible
Take total annual business miles & multiply by standard rate (57.5 cents per
mile, 2015)
Take annual business miles divided by total annual miles driven to get
percentage of business use. Multiply percentage times Auto Loan Interest.
IRS Publication 17 Chapter 26
Business Use of Home
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Exclusive Use – A room or separate identifiable space. The
space does not need to be marked off by a permanent
partition.
Regular Use
Must be related to trade or business
Square footage of space used for business divided by the
total square footage of home is used to determine the
percent of business use.
Direct Deductible Expenses:
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Indirect Deductible Expenses:
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Paint/Repairs just for the business use space
Utilities
Insurance
Repairs & Maintenance
Rent
Security System
Depreciation
IRS Publication 587
Depreciation / 179 Deductions
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Fixed Assets
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Special Depreciation Allowance – for qualified items
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Items that don’t wear out or get consumed in a year.
Computers, Filing Cabinets, Desk, Office Furniture, Leasehold
Improvements, etc.
Must be new item
Can take up to an additional 50% in depreciation in year of purchase
Section 179 Deduction – for qualified items
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Can be new or used item
Deduction limit $500,000 (last update published 2014)
Deduction limit for Leasehold Improvements $500,000 (last update
published 2014)
Deduction limit for qualified sport utility and certain other vehicles $25,000
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4 wheeled passenger vehicle
Rated at 6,000 pounds gross vehicle weight or more
But rated less than 14,000 pounds.
Purchase limit phase out starts at $2,000,000 (last update published 2014)
IRS Publication 946
Insurance
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Health Insurance on your W-2
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If your company has a group policy then the premiums reduce your box 1 wages reported
to the IRS as they are tax exempt.
There are special reporting requirements for S-Corp owners.
Pre-tax health insurance dollars also reduce wages subject to Social Security and Medicare.
HSAs vs. Traditional Health Insurance
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HSA
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transfers initial outlay costs to policy holder. Makes Insurance company pay more if annual
spending increases
Often has lower premiums
HSA accounts accumulated tax free and can be used for long term health care and private
nursing in later years
Contributions and withdrawals from HSA accounts are tax free
If self employed premiums deductible as Self-Employed Health Insurance
Require high deductible plans
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HSA contribution limit - $3,300 (single), $6,550 (family), catch-up provision for ages 55+ $1,000.
Traditional Plan (if you are self employed)
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Premiums are deductible as self-employed health insurance
Co-Pays
Can reduce premiums by increasing deductible, using PPO or POS plan
Disability
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Deductible Minimums: $1,250 Individual, $2,500 Family (2014)
Deductible Maximums: $6,350 Individual, $12,700 Family (2014)
Make your company the beneficiary
Hire someone to continue your business when you can’t
Filing Deadlines & Penalties
Please note the below are the general deadlines. They may vary if they fall on weekends
or holidays:
st
 Jan 31 – Employers distribute W-2s & 1099-Misc to recipients
 Feb 28th – Employers file W-2s & 1099-Misc with the Social Security & IRS (paper returns)
 March 31st – Employers file W-2s & 1099-Misc with the Social Security & IRS (electronic
returns)
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Mar 15th – Corporations & S-Corporations Deadline to file!!!
Apr 15th – Individual Returns, Partnerships, Sole Proprietors, IRA Contributions
Very important to note that Extensions to file are NOT an Extension to PAY!!! All Tax
payments are due on the filing dates above (March 15th or April 15th as applicable)!!!
Penalties
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Most penalties are calculated on the taxes due. So in most cases if there are no taxes
due there is no penalty.
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S-Corporation and Partnership Returns are an exception to this rule. Although these
two entity types do not pay Federal Income Tax, they can both be assessed a Civil
Penalty for failure to file if timely extensions are not filed or if under an extension the
return is not filed by the extension deadline. This penalty can range from $250 to
$5,000+.
Please note the Extension deadlines as well:
 Sep 15th – Corporations, S-Corporations & Partnerships Deadline to file!!!
 Oct 15th – Individual Returns, Sole Proprietors, IRA Contributions
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(IRA contributions must be made before filing return)
Resources
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Georgia Secretary of State
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IRS
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www.irs.gov
Pub 17, Federal Income Tax for Individuals)
Pub 15, Circular E (Employer Tax Guide)
Pub 542, Corporations
Pub 587, Business Use of Home
Pub 946, How to Depreciate Property
Pub 969, Health Savings Accounts & Other Tax-Favored Health Plans
Pub 1542, Per Diem Rates
Instructions for form 2553 (S-election)
Instructions for form 8832 (Entity designation)
Small Business Administration (SBA)
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Filing for Georgia Corporations & LLCs online at:
https://ecorp.sos.ga.gov/
www.sba.gov
Entrepreneur.com
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List of Best Banks for Small Business:
http://www.entrepreneur.com/bestbanks
Business
Basics
Maya K. L. Sims, CPA, MAF
Office @: Ahmed H. Zaki, CPA, PC
678-957-1913 (office)
Maya@ZakiCPA.com