Need Help Determining best Assumption on Monthly Tax Rate for Hypothetical Buisness

Factual Questions
1

Hi all,

A family member of mine is contemplating starting a business, and has requested my assistance in creating a balance sheet for this hypothetical business.

I am not entirely sure how to project taxation of business assets over these months. This would be my first time trying to construct a balance sheet. In fact, I have no idea how taxation of business’s work at all.
For reference, we are contemplating to set up of a Title Agency in New Jersey. We have a very well off family friend who has strong business connections who is ready to put up the capital.

I’m truly clueless about this stuff, so if anyone out there knows anything, please chime in!

2

Hire an accountant.

3

You need a lawyer AND an accountant. The lawyer will handle contracts to protect you and the person contributing capital, and the accountant will tell you about taxes and balance sheets.

Based on how you phrase the question, you know so little about it that I wouldn’t even know where to begin answering. For example, taxes generally apply to income rather than assets, and would depend on how the company is structured.

4

If you’re just trying to figure out the tax rate and marginal tax rate for a sole proprietorship, go here:
http://www.paycheckcity.com/calculator/netpay/us/new%20jersey/calculator.html

and plug in the profit of the business as if it was the gross pay.
Note the tax load for this individual.

That gets you the rate, except it leaves out self-employment tax.

This tells you about the joys of paying self-employment tax:
http://www.irs.gov/businesses/small/article/0,,id=98846,00.html

A super-rough calculation would be to multiply the gross income by 6.6% to calculate that.

You’re now in the ballpark of your actual tax rate.
For example, with a principal who is drawing on a gross profit of $100K:

So, I’m showing 32% based on the above. Add in 6.6% and you’re at about 38.6%.
You should ONLY take that very rough number as something to use in the very, very, very early planning stages of deciding whether or not to go into business.

To pick apart the example, by the time your gross is $100K, you should probably be in a C Corp or non-sole-proprietor apparatus, which could potentially get rid of your self-employment tax on as much as half of your gross.
Also, the calculator above, if you used it for my state, Ohio, would completely fail to notice the Commercial Activity Tax, which in some cases is 1% of your gross REVENUE, not your gross profit. That’s a massive difference.
And, for liability reasons, and liability can be massive in the land of title insurance, you really want to consider an LLC or LLP.

Short answer: get an accountant for an initial consult, even if you plan on preparing your own taxes.
That’s for ANYONE starting up a small business that will have a gross profit over maybe $1000.

Longer answer: for God’s sake, when a bank might be coming after you for a quarter million due to title defects, talk to a lawyer about whether or not you need an LLC or similar legal apparatus.

5

I agree completely with this assessment. The OP is well over his head already and hasn’t yet begun.

Having said that, businesses in many states also pay asset taxes annually on owned (or occasionally leased) equipment such as office furninshings & factory machinery. There are also often taxes on unsold inventory or work in process materials. While usually levied and paid annually, they are often budgeted monthly. That *might *be what the OP meant.

The company will also be liable for a variety of payroll & related taxes to both the Feds & the State & occasionally the city/county where it operates. These are often remitted monthly or even every pay period. So that *might *be what the OP meant.

Bottom line for Matt: Have the person starting the business hire experts ASAP. My wife is a corporate formations attorney, although not where you are. From decades of experience we know that it costs about 1/10th as much to do it right the first time as it costs to unsnarl the mess when well-meaning non-experts try to wing it.

One closing thought: If you have one noob and one “very well off” participant, you can assume the noob is about to be gypped unto death. The golden rule of business is very simple: Those which have the Gold … make the Rules. Longstanding friendship or even blood relationships are NOT a defense against this golden rule; not even close.

6

Thanks for the valuable information so far. I apologize for my misuse of jargon. That’s one of the reason’s why I accepted this project. It gives me incentive to learn all these important things which, until now, I’ve never had to pay attention to (still living at home / doing college).

While I’ll still try to build my balance sheet as accurately as possible, I will inform my family member of the necessity in getting professional advice.