by Lisa Shaw Part 3 of 6 Published June 23, 1997 other columns by Lisa Shaw		Starting your own business means that you'll finally be able to exercise your creativity on your own terms. However, even though you are self-employed, you still have a boss in the form of the government. Before you get to the good stuff, you'll have to establish a framework to satisfy the federal, state, and local governments — all of whom will want a cut of your business. Appease the gods by getting it right the first time. Here are the big issues you'll face: Should You Form a Sole Proprietorship, Partnership, or Corporation? A sole proprietorship is the form of business that most entrepreneurs start out with. It's easy to start — all you have to do is register with the state and you're in business. You make all the decisions yourself, and you're pretty much free from having to follow complex laws regarding the operation of your business. Any profit that your business earns are reported as income in your name. A partnership is two sole proprietorships combined. This means that, while the strengths are doubled, so are the inherent weaknesses. The best partnerships work when the partners have differing but complementary talents — and they leave the other partner alone to do what he or she does best. A corporation is best defined as a business organization that has its own needs aside from those of the business, which include financial and legal restrictions. It's more difficult, expensive, and time-consuming to form and then operate your business as a corporation, but it also absolves your formal personal responsibility in case business sours or in the rare case that someone decides to sue. Do You Need An Attorney? The good news is that, in most cases, you won't have to hire a lawyer to help you start your business. If you're planning to incorporate, you'll probably need to use a lawyer, although more people are learning how to incorporate themselves.
If you show a loss three years out of five, the IRS will go on red alert.		Do You Need Special Permits? You'll need to check with local, county, and state governments to learn about the various kinds of licenses and permits you'll need in order to start your business. Also, if you're going to operate your business out of your home, you should check with your local town ordinances to see if any restrictions are placed on home-based businesses. Do You Need An Accountant? If you're not sure about the type of business organization that will suit your business best — sole proprietorship, partnership, or corporation — it's a good idea to consult with an accountant to help you decide. It's also a good idea to find an accountant who has some experience keeping the books for small companies in your field; you may want to ask small businesses in your area for the names of some accountants they'd recommend to you. An accountant can also help you set up a realistic budget and a schedule of projected revenues, which can help you to raise money for your business. What About Keeping The Books? Once you get your business up and running to the point where you're generating regular income, it's important to keep track of your expenses and revenue sources. On the one hand, it will make things easier on April 15th, but it's also enlightening to know how much you spent on a particular area and to figure out how much money — and time — you could save at the end of the year by farming the work out to another business or independent contractor.
WEB RESOURCES: U.S. Small Business Administration Online A terrific resource with information about the Small Business Act, tips on starting and financing your business, local resources, and much more. The Official IRS Site Government-run source for forms and information. The Digital Daily A surprisingly cool news page from the IRS.		There are two kinds of accounting you can use to track revenue and expenses. One is cash accounting and it involves simple bookkeeping where income is recorded when it is received, and expenses that are paid are recorded when bills go out — even if the expense was incurred in a different month. Cash accounting is a very simple way to keep your books, and many entrepreneurs prefer it for its simplicity. Accrual accounting is more painstaking in its execution, but it gives a more accurate view of revenue and expenses, and of your monthly financial situation. Even though payment may be received or credited the following month — and expenses paid on a net 30 system, since the expenses occurred in the previous month — they are recorded in that month's ledgers, and not when they were actually paid. What About Taxes? The IRS allows that there will be years when you'll earn no profit on paper, even though it assumes you are in business to earn a profit. As a result, many businesses claim a wealth of deductions to avoid showing a profit and, therefore, paying tax. However, current tax law says that you must show a profit at least three years out of five to prove that you are running a viable business. If you show a loss three or more years out of the five, again, this will alert the IRS and set you up for the possibility of an audit. This is why some entrepreneurs, even though they may lose money on paper in a given year, may decide to "forget" about some deductions just to avoid arousing the suspicions of the IRS. Lisa Shaw has been minding her own business for 16 years. Shaw is the author of more than 20 books on business, travel, and cats; she is also the owner of Litterature, a company that produces greeting cards and gifts for cats and dogs. © 1997 Lisa Shaw. All Rights Reserved.