Dec. 28, 2022
As workplaces and work-life balance have been recalibrated in reaction to the pandemic, it increasingly feels as if just about everywhere you look around Connecticut, there’s a new business launching. Not surprisingly, the latest data reflect that changed reality.
Between January 2021 and October 2022, nearly 23,600 people filed notice with the Internal Revenue Service of their intent to start up new companies in Connecticut with the intent of adding payroll, according to the U.S. Census Bureau.
That was about 5,650 more filings from the same period in 2018 and 2019, which is a dramatic 31 percent increase. Recognizing the newly invigorated zeal for entrepreneurship, the State of Connecticut has streamlined the administrative process for starting a business, introducing an online one-stop business checklist, estimated to take just 10 minutes to complete.
For new business owners, getting started is only the beginning of the possibilities that await. With tax season just around the corner as the new year approaches, it’s fair to say that taxes can be a big factor in the success of an organization regardless of size, industry, and standing.
For highly profitable firms, taxes can cut into large margins and take away a lot of profit. For firms that are struggling, taxes can be the nail-in-the-coffin that sends the firm under. Larger corporations tend to have the ability to hire professionals to lobby the government and obtain tax breaks, while small business owners rarely have that opportunity.
Therefore, the importance of utilizing tax savings strategies in the small business realm cannot be understated. If the business owner is approaching retirement in the not-too-distant future, the consequences are magnified. Fortunately, there are strategies that can make a difference where it counts – on the bottom line, now and in the future.
Small and medium enterprises (SMEs) are businesses that meet certain requirements based on ownership structure, number of employees, earnings, and respective industry. Nationwide, this group of businesses is vast, with more than 32.5 million SMEs in the United States in 2021, which accounts for 99 percent of all firms in the country.
For tax purposes, the IRS does not explicitly categorize SMEs, but rather groups together self-employed persons and small businesses. Small businesses are classified as any company that has assets of $10 million or less.
For businesses in general, and small businesses specifically, tax planning can take place in several forms, but the ultimate goal is to minimize tax liabilities. Individuals and businesses alike undertake this process in order to preserve wealth and ensure financial longevity. A tax efficient plan is one that works properly to ensure all elements of a business owner’s strategy are operating together in order to pay the least amount of taxes possible, described as “tax reduction.”
Owning a small business grants an individual a lot of flexibility. From how day-to-day operations are handled, to hiring practices, to payment periods, and everything in between can be set and changed with vast variability. There are many positives and negatives that come with the freedom to operate how an individual pleases. The objective is to maximize the positives and minimize the negatives.
There are a multitude of key decision points for small business owners, and many have tax ramifications. That’s why a carefully designed plan, with the goals and objectives of the small business owner driving decisions, is key.
The business structure of a new enterprise, how many employees to hire and what benefits to provide, whether to take out a loan to start the business or to help bridge a challenging year or season — these are just a handful of the decisions that often need to be made, all of which could have tax implications.
During COVID, an array of federal financial assistance programs were introduced, designed to help businesses in particularly tumultuous times – but which also could have ramifications at tax time. The end of the year is also pivotal for a small business and its owner(s) — and an excellent time to create a detailed tax plan for the coming years in order to minimize avoidable tax burdens.
All of which is why a business owner — particularly a first-time business owner — would do well to consult a professional. Financial advisors and wealth managers can provide valuable insights, such as how to ensure financial stability for the firm or an individual portfolio that the firm is funding.
As with most things in life, it is better to know sooner than later, and better to know more than less. There’s hardly a better way to establish the sound footing that can further the success of the enterprise, and the prospects of the fledgling small business owner.
Certified Financial Planner and CPWA Professional Ben Fuchs is Founder of Fuchs Financial, with offices in West Hartford and Middletown.
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