The process of starting a small business can be an arduous one; there are numerous steps that need to be taken — and often in a precise order — to legally establish a business. As a result, the process can be overwhelming. Unfortunately, it’s also easy to overlook some important details and steps along the way. By being aware of a few of the most common legal and compliance mistakes made by small business owners when starting out, you can be better prepared for future success.
1. Misclassifying Employees as Independent Contractors
Regulators are coming down hard on misclassifications. The IRS estimates that this problem includes millions of workers. It is best to talk this through with an expert, but you can get some background on the guidelines at the United States Department of Labor website.
2. Choosing the Wrong Business Structure
One of the first major decisions you’ll need to make in regards to your small business is the type of business structure you will select. This can range anywhere from a basic sole proprietorship (which doesn’t require any special forms or paperwork) to a more complex structure, such as a corporation or LLC. Keep in mind that different types of business structures offer different tax benefits and other protections, so it’s important to thoroughly explore your options and select the structure that’s best for your unique needs. You’ll also need to go through the legal process of establishing your business under your desired structure, which may require help from a legal or other type of professional.
3. Failing to Apply for an Employer Identification Number
Unless you plan on operating your business strictly as a sole proprietorship (in which case, you will use your personal Social Security number when filing taxes), you’ll also need to apply for a unique Employer Identification Number (EIN). This number will be specifically associated with your business, and it can be helpful to think of it as a business Social Security number of sorts; it’s used to file your business taxes, open up dedicated business bank accounts, and the like.
4. Overlooking Important Permits and Licenses
Depending on the specific industry in which your business will be operating and your location, you may also be required to obtain specialized licenses and/or permits in order to legally operate. Otherwise, you’ll run the risk of being shut down or finding yourself in serious legal trouble down the road. Take some time to research the specific types of permits or licenses that you may need to obtain, as well as the steps you’ll need to take in order to acquire them. Sometimes, this process can be time-consuming and even costly, so it’s not something you’ll want to put off until the last minute.
5. Not Knowing When to Speak to a Professional
When starting up a small business, it’s not uncommon to run a one-man (or woman) operation. After all, you may not have the cash flow or even the need to hire outside help in the early stages. Still, when it comes to making sure your business is squared away from a legal/compliance standpoint, it can certainly be worth the money to consult with tax and accounting professionals early in the game. You don’t necessarily need to onboard these experts full-time, but being able to turn to them for advice and guidance when you need it will help you avoid serious legal issues later on.
6. Putting Off Domain Name Registration
As soon as you have your business name picked out and registered, it’s also in your best interest to go ahead and register your website domain as soon as possible. Even if you don’t plan on setting up and launching your website any time soon, domain names are cheap, and having yours registered now will help you avoid a situation where the domain name you want is taken by somebody else later on.
7. Lack of a Comprehensive Business Plan
One of the biggest mistakes small business owners make when first starting out is that of not having a well thought-out and articulated business plan. A business plan is an important document that outlines in detail what your goals for your business are and how you will achieve them. This document is important not just for you and other members of your immediate team, but for potential investors as well. Should you seek financing for your company at any point, an investor is going to want to see and scrutinize your business plan — and it will likely have a major impact on the final decision.
8. Not Having Finances Squared Away
Another common mistake new business owners make is that of poor financial planning, which can lead to a lack of funding to get you through your first months successfully. Ideally, you’ll want to make sure your business plan accounts for all the company-related expenses you’ll incur during the first year of operation, as well as any personal expenses as well. Unfortunately, this is something that many small business owners overlook or miscalculate with disastrous results. The easiest way to avoid this mistake is to consult with a small business accountant during the early stages of drafting your business plan.
9. Failing to File Patents on Products or Ideas
It’s (hopefully) no surprise that you’ll want to be proactive about filing for patents for any unique products, prototypes or designs you may have. However, what many small business owners first starting out don’t realize is that they’ll also want to file patents on ideas, such as intellectual property, that could otherwise be stolen or copied and used by other entrepreneurs. After all, intellectual property can be just as valuable as a product prototype — so you’ll want to plan and protect these kinds of ideas accordingly.
Be careful to also avoid the mistake of waiting too long to file for relevant patents; the process can often be long and drawn out, so getting started as early as possible will be in your best interest.
Offer in Compromise FAQs
We’re all responsible for paying our fair share of taxes each year. But what happens when the amount that you owe is simply out of reach? What happens if you failed to make payments in a timely manner and your financial circumstances have shifted to the point where your cumulative debt is beyond your ability to pay? In the face of this untenable position, your best option for paying the IRS may be what is known as an Offer in Compromise.
The Goal of the Offer in Compromise
The Offer in Compromise, or OIC, was created to accomplish two goals: it allows American taxpayers who are unable to pay the full amount of their tax debt a way to negotiate a payment that is in keeping with their ability to pay, while at the same time providing the IRS with the ability to collect at least a portion of the amount that is owed to them. The process is neither simple nor fast: it generally takes at least one to two years for both sides to come to an agreement on an amount to be paid.
Even so, it has certain advantages for both sides.
An Offer in Compromise generally allows for resolution to be accomplished outside of court, with the agreed-to payment reflective of income and assets rather than the actual amount of debt that has accrued. Though it may seem a loss for the IRS, the agency ends up recovering more as a result of settling than they are likely to through a strong-arm collection process.
Understanding the Available Offer in Compromise Options
Taxpayers interested in pursuing an Offer in Compromise generally have three different options available to them under federal law. They are to suggest that they do not actually owe the tax debt that they are being charged with; to indicate that there simply are not enough assets or income to make a payment on the debt that has accrued; or to pursue a compromise based on either exceptional circumstances or economic hardship. This last option falls under the category of “effective tax administration,” and is notable because the taxpayer makes no argument as to either their ability to pay or whether they, in fact, owe the named amount.
Applying for an Offer in Compromise
The OIC process is both time-consuming and complicated. Applications require specific forms as well as extensive documentation, and all must be accurately prepared in keeping with IRS regulations. When mistakes are made or forms are incomplete the applications are quickly returned without the benefit of a review. To minimize both delay and frustration, it is strongly suggested that taxpayers looking to avail themselves of an OIC employ tax professionals for both the preparation of their paperwork and the negotiation of its terms.
Not Every OIC Application is Approved
It is also important to remember that an application for an OIC by no means guarantees the desired outcome. Submitting the specifics of your situation to a qualified tax professional will provide you with the ability to have your case reviewed by an expert who understands the process and the IRS criteria for approval, and who will be able to give you a reasoned perspective on the viability of your request.
Working with a professional will also provide you with reasonable expectations regarding the amount of time that the process will take and what your chances are of having your initial offer accepted. The program generally takes about two years from start to finish, and it is common for the IRS to make a counteroffer when the agency believes it will be able to collect more than the amount proffered by the applicant.
In evaluating your case, the Internal Revenue Service will likely pay less attention to the actual amount that is owed than the amount that the taxpayer is able to pay. This determination will be made on the basis of numerous factors, including income, assets, previous earnings capacity and anticipation of your earnings capacity in the future. Living expenses will also be taken into consideration.
The good news is that from the time that an application is sent in and while an IRS evaluation is taking place, most collection efforts are frozen. This generally provides tremendous relief from stress for taxpayers who have fallen behind in their payments and who feel unable to submit the amount that they owe.
If you have found yourself in this situation, contact us today to discuss your options. An experienced and knowledgeable tax expert will help you to understand, anticipate, and prepare for all aspects of the Offer in Compromise process, and will act as your advocate during sensitive negotiations.