Author: J. William Strickland, CPA, J.D.
This article originally appeared in the Spring 2025 issue of the South Carolina CPA Report
What do you say when a client walks into your office and tells you he or she quit their job (or was fired) and wants to start a new business? Do you say, “I’m sorry to hear that,” or “Congratulations, you are now an entrepreneur!” I start with, “Tell me about your idea for a business.”
When you hear what he or she wants to do, you use your experience to help them hone their idea and avoid pitfalls. Let’s say the client is interested in starting up a landscaping business. The client plans to buy a truck and trailer, a Bobcat, commercial lawnmower, gas weed eaters, fertilizing equipment, shovels, rakes, etc. How many employees will the client have? Three, not counting himself/herself.
Does the client have a name for the business? It is easy to check name availability on the Secretary of State’s website. John Doe’s Premium Lawn Care and Landscape, LLC is available!
Has the client already consulted with a lawyer? If not, you can recommend one of your professional acquaintances to assist in the process where legal advice is required.
Before you send the client to the lawyer, discuss the best form of business for the client: sole proprietorship, corporation, or limited liability company.
Sole proprietorship is probably not a good idea due to risk factors of the business. Incorporation will require attorney involvement, as the lawyer has to sign the Articles of Incorporation. A limited liability company has options that a corporation does not have, plus the LLC can be a disregarded entity, a partnership, or elect to be taxed as an S corporation.
Since a corporation will need bylaws, and you want an LLC to have a good Operating Agreement, give the client three references for attorneys with whom you are comfortable so that the client will have the best service.
Next, who is going to keep the books and records? Oh, it is going to be the spouse. Will the spouse be an employee or a co-owner? If the spouse is female and owns 51% or more of the business, it will be considered a minority-owned enterprise, which might be beneficial in bidding certain contracts. Make sure she is the president of a corporation or a manager of an LLC, so that she has the legal authority to back up her ownership. Also, does the spouse have accounting skills? What computer application(s) do you recommend to the client? QuickBooks may dominate for small businesses, but NetSuite is making a push to enter the smaller business market. Do you have a favorite that you can consult with the client when the client needs to know how to make an accounting entry?
Let’s say the client likes the idea of an LLC. In my practice, I would say that 95% of new entities formed in the last 20 years have been LLCs.
Next question: Partnership or S corporation? How profitable does the client plan to be? Does the client have at least a bare-bones five-year business plan?
Let’s say that the client expects to have gross billings of $200,000 with a payroll of $90,000 and supply expenses of $40,000, leaving a potential profit of $70,000. If the client operates as a disregarded entity or forms a partnership with the spouse, all of the profit will be subject to self-employment tax. The S corporation format would require the client to receive a reasonable salary; however, since the investment in equipment is a material income-producing factor, not all of the profit would need to be paid out as salary, which would effectively save about 12% to 13% on the residual profit. Note that if the profit expectation is significantly smaller, say $25,000 to $40,000, the self-employment tax savings might not be worth the extra expense of accounting, paying and reporting salary for the owner(s). Also, if the profit expectation is significantly higher—say, over $175,000—the advantage of a higher Social Security benefit at retirement might outweigh the irritation of paying only the 2.9% Medicare tax on the excess profit.
Now we have recommended that the client’s best interests would be served by forming an LLC, electing S corporation status, having both spouses as owners, and purchasing QuickBooks. Send the client to the lawyer and ask the client to bring in the Articles of Organization and the Operating Agreement as soon as they have been drafted and the Articles of Organization have been filed with the Secretary of State. Many lawyers can do this in a single morning or afternoon, even though the client may have to wait several weeks for a company book which would have a seal, minutes, certificates, and blank forms as well as a place to keep the original Articles of Organization and Operating Agreement.
At the next meeting with the client, obtain an Employer Identification Number for the LLC, complete Form 2553, and set up a chart of accounts in the client’s accounting software. Instruct the client to set up a bank account and invoice the company for any start-up expenses incurred to date. Set a follow-up meeting in a month to make sure the client is on track with the bookkeeping and reconciliation process and to answer any questions. Be sure your client understands that you are available to answer any business questions, not just tax and accounting matters. You have broad experience across multiple industries and can provide much-needed guidance as the client sets out.
Now give your client a token of appreciation and best wishes for success. You have helped save your client from common pitfalls. Congratulations.
