Are you and your spouse looking to turn your shared vision into a thriving family business?
Transitioning from partners in life to partners in business is both exciting and challenging. But it requires more than just a great idea – you need a solid business strategy.
From choosing the right entity structure to understanding tax implications, laying a solid foundation in terms of legal and financial setup is crucial. Our CPAs have helped remedy many unofficial businesses, but the retrospective costs and complications can be risky. Safeguarding your venture from the start is essential. Here’s what you need to know to make your venture a success.
Choosing the Right Business Structure
The business structure you choose impacts how you pay taxes, your liability, and the way you operate. Some key questions to consider:
- Liability Protection: Do you own significant personal assets that you want to protect? How comfortable are you with personal liability for business debts?
- Tax Implications: Are you looking to maximize tax deductions as a couple? Would you prefer to file taxes jointly as a couple or separately as business partners?
- Legal Terms: Do you both want equal decision-making power? How would you like profits and losses to be shared?
- Long-Term Business Goals: Is this a short-term venture, or are you building a legacy for future generations? Do you plan to bring in other family members or partners in the future? What would happen if one spouse wants to exit the business?
Consulting with an expert to clarify your goals and tax considerations is a good starting point. Here’s an overview of the main business structures:
- Sole Proprietorship: Simple to set up but offers no personal liability protection.
- Partnership: Easy to form but can be risky in terms of personal liability for business debts.
- LLC (Limited Liability Company): Combines liability protection with tax flexibility, making it a popular choice for couples.
- Corporation: Offers the highest liability protection but involves complex tax and regulatory requirements.
Registering Your Business Family Business
To operate legally, you must register your family business at both federal and state levels. You can consult with an expert to complete the following steps as part of the process.
- Choose a Business Name: Ensure it’s unique and available for registration.
- Obtain an EIN (Employer Identification Number): Required for tax purposes.
- State Registration: Depending on the business structure, you may need to file Articles of Organization or Incorporation.
- Licensing and Permits: Check for industry-specific licensing requirements to operate legally.
Understanding Tax Implications
Your business structure affects how you file taxes. Here’s what to consider:
- Filing as a Married Couple vs. Business Partners:
- Married Filing Jointly: This filing status typically offers more tax benefits, including a higher standard deduction ($27,700 in 2024) and access to more tax credits. However, it also combines both spouses’ incomes, which could push you into a higher tax bracket.
- Partnership or LLC (Separate Business Filing): If you operate as a partnership or LLC, the business files its own tax return (Form 1065) but passes income through to the spouses, who then report it on their personal tax returns. This allows for more flexibility in income splitting and potential tax savings.
- Tax Credits and Deductions: If your business is structured as a pass-through entity (e.g., LLC or S Corp), you may be eligible for a 20% deduction on qualified business income. The same goes for deductions like home office expenses and setting up a Solo 401(k) or SEP IRA.
- Sales Tax, Payroll Tax, and Compliance: Depending on your business activities, you may need to collect sales tax, manage payroll taxes, and make quarterly estimated tax payments.
Setting Up Financial Systems
A key part of your business – and often a challenging one to navigate between life partners, is effective financial management. However, this is key to your sustainability and compliance. Start by:
- Separate Personal and Business Bank Accounts: Mixing personal and business finances makes expense tracking difficult and can lead to compliance issues.
- Implement Automation: Reliable accounting software like QuickBooks or NetSuite streamlines tedious recordkeeping tasks while ensuring accuracy and compliance.
- Cover Yourself Legally: Organize essential legal documents, including prenuptial agreements and business contracts, to protect your personal assets and clarify business arrangements.
Need help getting started? At Fusion, we help you navigate family business setups from a financial perspective and guide you through the compliance complexities with our business continuity plan.
The Fusion CPA 12-Month Business Continuity Blueprint
Beyond setting up your business, we help you with leadership, operational, and financial planning for your family businesses. Key components include:
- Leadership & Succession Planning: Our plans include establishing clear decision-making protocols to set your business up for generational success.
- Risk Management & Operations: We incorporate contingency plans into your planning to ensure strict protocols for unexpected disruptions.
- Financial & Estate Planning: Need your ownership structure reviewed? We help with tax-efficient wealth distribution.
- Family Governance & Communication: We ensure clearly defined business roles that align with legacy goals. This includes developing structured meeting agendas for governance and smooth operational processes.
Contact us for help today.
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog. The same applies to the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.