So you’re considering taking the leap from employee to tax practice owner. Being a business owner certainly has its perks, but it’s no easy feat. There are a lot of considerations involved in starting a tax practice. We’ve rounded up five of the most important ones.
Your Overall Plan
What vision do you have for your practice? Developing an overall plan may seem obvious, but it’s a step that requires a lot of thought. You need to ask yourself core questions such as:
- Am I going to run a brick and mortar tax practice or a virtual one?
- Where will my office be located?
- Which services will I offer?
- Will I be hiring employees?
- What expenses will I need to cover?
- How will I acquire clients?
There are so many sub-questions under these umbrella questions that we’re not going to attempt to cover them all, but the key takeaway here is to get the gears turning. There are a lot of practical needs to be met before you can move on to the more fine-tuned details of starting a practice.
Types of Entities
Once you’ve developed an overall plan for your practice you should move on to picking an entity. As you know, different types of entities have different tax and legal implications. You can talk with an attorney to discuss the best option for you, but here’s a brief overview of some of the most common small business entity types:
Sole Proprietorship: A business that legally has no separate existence from its owner including no separation of liability. Income and losses are taxed on the individual's personal income tax return. This is, however, the easiest entity to set up.
Limited Liability Company (LLC): A form of business organization with the liability-shield advantages of a corporation and the flexibility and tax pass-through advantages of a partnership or sole proprietorship in the case of a single-member LLC.
Partnership: A legal form of business operation between two or more individuals who share management and profits.
C Corporation: A corporation that is legally viewed as an individual entity, separate from its owners, who are now shareholders.
S Corporation: A special form of corporation that allows the protection of limited liability but direct flow-through of profits and losses.
Keep in mind that your practice will likely evolve over time, and you may want to re-evaluate which entity type is best for your business when the time comes.
Once you’ve chosen an entity, you have to register your business. Depending on the entity and your state you could have different registration requirements, but in general, here’s what getting your practice registered includes:
1) File a Doing Business As (DBA). If you choose to go the non-corporation route, you can file a DBA which registers your business name.
2) Opt for a LLC or corporation. If your business is an LLC or corporation it will automatically be registered with your state, but you should check for additional state requirements.
3) Find out if you need an Employer Identification Number (EIN). An EIN identifies a business entity. You can check out these IRS guidelines to determine if you need one. Typically businesses do need an EIN.
Types of Insurance
Insurance is going to be one of your biggest and most important expenses. There are various kinds of insurance you may need or want depending on your unique situation. Here are some of the types of insurance to consider purchasing:
Health Insurance: For yourself and employees if you have any.
Disability Insurance: In case you become unable to work.
Liability Insurance: For protection against “slip-and-fall” complaints whether you own or rent your office space.
Hazard Insurance: For those who own their office building and want protection from damage done by fires, storms, earthquakes, etc.
Malpractice Insurance: For protection from certain claims made for negligence, errors, and omissions while performing tax services.
Worker’s Compensation: A potentially appealing benefit to employees.
"Don't put off getting insurance as it can seriously affect your ability to grow your business or obtain new clients." –Joni Johnson-Powe JD, CPA
Whether you have clients you’ve known for years or are starting from scratch, you should think about what your growth strategy will be. Your business plan can be as well thought out as possible, but if you don’t have the clients to generate enough profit, you won’t be successful.
There are countless marketing strategies out there, but you need to find the ones that will work for you. Some methods you could work into your larger marketing strategy include:
- Using social media as a tool to connect with potential clients
- Build a large referral network
- Running a radio ad on a local station
- Trying your hand at email marketing
There are many other steps involved in starting a tax practice and running it successfully, but if you think about these five before you even start the process, you’ll be in good shape moving forward.