The foundation of your building blocks should start with a well thought out business plan. Take your time in structuring the financing, location and necessary licenses for your business. You do not want to rush through this step because one mistake could prevent your business from ever getting started. When applying for a business loan, keep in mind that the institution will not want to inflate your loan by what you need personally for living expenses. With that being said, you should have anywhere from six to 12 months of living expenses in a cash account. Your business will most likely not be profitable for an extended period of time, so anticipate living on your reserves.
The second item that you should explore is how you should incorporate the business; this will affect how your profits will be taxed and what level of liability you will be exposed to. For liability reasons, small businesses should not be operated as sole proprietorships or as general partnerships. It is only a matter of time before any successful business becomes the target of some form of litigation, and your personal assets need to be protected from the liabilities of your business. Most small-business owners should operate their business as an “S” corporation or an LLC, both for asset protection and tax reasons. Note: businesses that operate in the ownership of real estate should almost always use an LLC, which allows more flexibility regarding the transfer of properties between the entity and the owners without tax consequences. Another potential LLC benefit is that its owners are not required to pay out profits in proportion to ownership.
From a tax perspective, an “S” corporation and LLC may help reduce the amount that business owners pay to the IRS. By law, the “S” corporation and LLC are required to pay all net profits to the owners each year via dividends or distributions. While the dividends or distributions are taxed as ordinary income, they avoid paying the self employment tax which is 6.2 percent. A smart way to reduce your long-term tax liability would be to pay yourself a modest salary and then receive the remaining of your annual income from the company’s profit in a form of a dividend or distribution
Another way to reduce your tax liability would be to start a qualified retirement plan (401(k), profit sharing, Define Benefit, SEP IRA or SIMPLE IRA). Depending on how your business is organized, you could enjoy favorable tax benefits if you were to forgo some salary by investing in your plan. Your contribution to your qualified plan would entitle you to receive a dollar-for-dollar tax deduction on the amount invested. The money then is in your name and will grow tax deferred until your retirement. One thing to keep in mind when you are contributing to a qualified plan—the IRS does not like you to take withdrawals from the qualified account until fifty-nine and one-half, without incurring a 10 percent penalty. There are exceptions to this rule, including loans from a 401(k) plan, but keep in mind that the account should be looked at as a long-term investment. Upon retirement, when you withdraw money from your place, the distribution will be considered ordinary income.
Understanding some of the basic building blocks of business can make a significant difference in whether or not your company is successful. Following a business plan, protecting your personal assets and implementing income tax strategies are essential building blocks for starting and maintaining a successful business.

Jacob Gold is president and CEO of Jacob Gold and Associates, Inc.
Michael Gold is a member of the State Bar of Arizona and an associate with Ingwersen and Taylor, LLP located in Atlanta, practicing in the area of estate and tax planning.

www.jacobgold.com
www.itllp-law.com