Now that we have our entities let’s get started...
Records
On Day One you’ve got to think about setting up your bookkeeping and tax system. Federal and state taxes fall into a pattern of quarterly and annual requirements and before you know it they will be due. So start working on this on your first day.
Good records and a great team working with you are your best defenses against repercussions from mistakes. A bookkeeper or CPA on your team can handle quarterly tax requirements and paperwork. The expense is worth it for the peace of mind – and to free you up to do what you really want to do. Even though you’re still completing the initial paperwork to flesh out your entity and kick off your business, taking the time to make the right choices in your accounting and record keeping can pay off in saved time and money once your business is up and booming.
Apply for an EIN (Employer Identification Number)
Once you’ve filed your incorporation papers and they’ve been approved by the Secretary of State, your corporation needs to file for an Employer Identification Number, or EIN. An EIN is a permanent number assigned to your business which is used for official corporate business such as opening bank accounts and paying taxes. Think of an EIN as a Social Security number for your business. If you’ve hired a professional team to set up your corporation or LLC, they may apply for the EIN for your business. Be sure to confirm that they are doing it.
The IRS allows businesses to apply for an EIN online, or by phone, fax or mail. If applying online, the EIN is assigned immediately upon completion of the interview-style application that walks you through type of business, identity of business, authentication, addresses, details and confirmation of the new EIN number. But even though receiving the number is immediate, it can take up to two weeks to be added into the IRS database and until it is added, the number can’t be used for filing returns.
Start Your Record Keeping
Once you’re up and running, having a system in place for keeping track of tax records will make day-to-day business run smoother. Some of the documents you’ll be providing your CPA for your tax returns include financial statements and your financial records you’re keeping either through a manual system or on a system such as Intuit QuickBooks. You’ll also want to keep track of bank statements, equipment bought and sold by the corporation during the year, loans and detailed information about them, and detail on the estimated tax payments you’ve made to both federal and state tax entities. Keeping track of this information as it flows in and out of your business makes putting your hands on it at tax time less taxing and far less of a headache.
And now, back to one of our teams...
Tom and Nancy
Tom and Nancy’s first day was a good one. Eight months previous they had put in a bid for the civil engineering of a small sewer plant in Chase Fields. They had not heard anything since and had forgotten about it. That morning they received a call saying they had won the bid. Tom mentioned they were now a professional corporation and asked if the Chase Fields contract could be in their corporate name. The project manager said that was not a problem and asked them to come in and sign it.
Tom, Nancy and Dooger the Great Dane drove down to the construction office. After letting Dooger romp around the lot, the humans got down to the signing. The contractor said he liked their company name – Green Engineers – and commented how funny it was that amongst all the green environmental wannabes their last name was actually Green. The project manager wrote a check out to Green Engineers, P.C. for the first progress payment.
Tom and Nancy were driving back to their home office in a good mood. They had their first job since the lawsuit and a check in their new corporate name to prove it. Nancy suggested they stop by their bank and cash the check. They could certainly use the money.
When they entered the bank and presented the check to the teller there was confusion. Tom and Nancy had an account opened in the name of their living trust, The Green Family Living Trust. But the teller noted this was made out to Green Engineers, PC. Did they have an account in that name? Tom explained that they had an account at the bank. What else did they need?
The branch manager quickly came over. In a somewhat smug manner he explained that because the check was made out to a corporation they would need to open a corporate account. To do that they would need to bring in a copy of the corporation’s articles of incorporation filed with the state and the company’s EIN. Nancy asked what that was. The manager explained with exasperation that the Employer Identification Number, or EIN, was issued to corporations, LLCs and other entities by the IRS. It was akin to a Social Security Number for a business. Under the rules, they couldn’t open a corporate bank account without one.
Nancy grew a little exasperated herself. They needed to cash the check right away. The manager said Nancy could go online to the IRS website and promptly get an EIN. Or the attorney preparing their corporation could get it for her. But until then, they couldn’t cash the check. At that point Dooger, who had been waiting outside, burst in through an open door and created a big commotion. The teller, who always had a cookie ready for the lovable dog, happily squealed his name. The branch manager, however, was quite upset by it all, and so Tom and Nancy decided to leave with the cookie munching pooch in tow.
After leaving the bank, Tom called their attorney Katherine to inquire as to the status of the filing and how they could cash the check. Katherine replied that she had just received in record time the license documents from the State Engineers Division she needed for filing a professional corporation. She was sending it all in that day and she estimated that it would take another week to ten days to get the corporate paperwork back from the Secretary of State’s office. Until then, they couldn’t cash the check.
Tom and Nancy finally gave into the fact that they weren’t going to get at their money right away. Katherine then explained there was a procedure for getting money out of a corporation. They would either do it as a salary payment (with payroll taxes and income taxes withheld) or as a distribution. In either case, they had to follow proper accounting procedures. Katherine asked if either of them had any bookkeeper experience. Nancy knew where the conversation was headed and said they would be hiring a bookkeeper.
As they continued driving home, Nancy asked Tom to drive through a commercial district near their neighborhood. Nancy had seen the bold red sign many times as she drove by. Now it was time to stop in at....
Betty’s Bookkeeping
Corporate Formalities
As we’ve discussed, corporate formalities are important. By following these simple rules you can avoid being held personally responsible for future company blues. So you will hold your initial corporate meeting and record what happened (which writings are called ‘corporate minutes’). These corporate minutes are easy to prepare. (Note how they are not called ‘corporate hours.’)
You can hold your first corporation, LLC or LP meeting on Day One or it may occur in the first 10 or so days after your entity is filed with the Secretary of State. Exactly when it occurs initially is not as important as it is that it does occur shortly after you are formed. Take the time to flesh out your corporation on paper. It is through all this paper that