Ask the Small Biz Adviser By Stephen Windhaus • Bankrate.com

Startup procedures for a new entrepreneur

Dear Small Biz Adviser:
My wife is going to become an independent contractor as a sales rep for several art companies. Is there a beneficial method to set up her business? She will be working out of the house. I would like to set up some sort of business for her. Thank you.
Fred

Dear Fred:
There are many things to consider when starting this business, and you have a bit of reading and research to conduct prior to making important startup decisions.

Begin by determining which is the best legal business structure for your wife's venture. The simplest is proprietorship.

A corporate structure, however, allows for a degree of protection in case of liability associated with the work. Many startups that opt to incorporate choose the S corporation. It allows for some compensation in the form of dividends while simultaneously reducing Social Security and Medicare deduction expenses.

Limited liability company status as a proprietorship provides a degree of protection but is not as encompassing as a corporation. This Bankrate.com story provides an overview of the various operating structures. Additional information is available at the Corporate Creations FAQ page.

If your wife wants to have a company name other than just her name, a fictitious name process begins with your state's Department of State, simultaneously filing an announcement to that effect with the local newspaper.

Since she will be self-employed with no other employees, in most states your wife will not be required to secure a Federal Employment Identification Number from the IRS or the state in which the business will reside. Her Social Security number will suffice.

For all state-related issues above you can visit the Global Computing directory, locate your state's Web site and then find the page for the Secretary of State.

Accounting for expenses
Now let us consider the money angle. Entrepreneurs can be confused about what qualifies as a business expense when starting and operating a business, especially a home-based one.

Start with some Internal Revenue Service reading: Publication 535, Business Expenses; Publication 583, Starting a Business and Keeping Records; Publication 587, Business Use of Your Home; and Publication 533, Self-Employment Tax.

In reviewing these materials, keep the following in mind:

• The difference between personal and business expenses. These are sometimes confused. A classic example is automotive expenses. Keep detailed records that differentiate between personal and business use of a vehicle.
  
  
• The need to maintain comprehensive business expense records. Keep all receipts for expenses related exclusively to the business operation. For every piece of office equipment you purchase, hold on to the receipt and decide immediately what form of depreciation you will use. Otherwise, wait until the end of the year, purchase tax software and let it take you through the process, including preceding years. But don't lose the receipts.
  
  
• Take advantage of household costs attributable to the home-based business. Many entrepreneurs don't recognize that a portion of their home's mortgage, real estate and utilities expenses can be redirected to the business operation. New IRS rules also makes these deductions more valuable when selling; you no longer have to allocate gain between home-business and residential use when you sell your house.
  
  
• Don't overlook Social Security and Medicare taxes. You're not off the hook for these payments just because you work for yourself. Your venture's legal structure will determine how much is paid by the business and the owner into those funds.

There are pros and cons to being self-employed. If ownership is the route your wife wants to take, I wish her the best of success. To achieve that success more quickly, do your homework and know your obligations.