Guest Article by member Myra Jolivet
Numbers, business plans? Increasingly, even the most creative of us communicators find value in learning business basics. Knowing the basics can not only prepare us for an uncertain future, but can expand our options, or enable us to supplement our finances in retirement.
Tax and Business Law Attorney Patrick Collins gives us some great advice to use now or even apply later, should we ever need to put a plan B into action. I asked Patrick a few questions. Here are his answers:
If we find ourselves transitioning from employee to contract/freelance work; what should be our first steps in setting up our business?
First, consult a lawyer, financial planner, and/or a tax professional regarding business structure, finances, and tax consequences. Secondly, obtain any licenses or certifications and insurance required for the work you plan to do. Get a business license from the city you plan to do business in, and the city you plan open your office. (Note: if any part of your name or a variation of your name is in the title of your business you do not need to register a DBA with the County Clerk); and 4) get a Federal Employer Identification Number (“FEIN”).
What is one of the most common financial mistakes you see small businesses make?
The most common financial mistake I see small businesses make is forming a corporation before it is necessary. Corporations in CA are liable for a minimum tax of $800 each year regardless of losses or inactivity, however in their first year of formation they may be granted an exemption from this minimum fee. So, wait until the New Year to get the full value of the first year tax exemption, and the business risks and or activity justify the need for a corporation, before forming one. Also, CA charges a total of $125 for corporate registration so don””t pay $300 or more to an online company or other entity to form a corporation. A corporation””s annual cost for tax preparation, accounting, and tax payment is a minimum investment of $1,500 per year.
What are some things we can write off of our taxes that people don””t often realize?
The most commonly overlooked expense deduction for most self-employed professionals is the home office deduction. This deduction enables those who work from home to deduct the portion of household utilities, repairs, rent, phone, and miscellaneous household expenses relative to the business use percentage of the home. Also, commissions paid to others, legal and professional fees, vehicle mileage instead of actual vehicle expenses (government currently pays $.55 per mile for business use of vehicle), and interest paid on credit cards and loans used to finance business purchases.
What else should a new freelancer keep in mind?
Good record keeping is the key to good business management. Record keeping enables you to track your performance and therefore to make informed business decisions. It is also a must if you intend to attract either private investors or banks to invest in your business.