One of the first emails to hit my inbox in 2018 is from someone looking to start a new business. Below is my correspondence and general advice to this new entrepreneur. Happy New Year!
Thank you for getting back to me. In the new year I will be looking to start my own business. I will be working as a 1099 contractor managing studies for clinical research. I was wondering what it the best type of business entity for me to setup and begin a retirement plan?
Thank for your help, Dave
Congratulations on starting your own business! Have you run a small business before? I am reading The E-Myth Revisited and finding it very helpful in thinking about my own small business (now 9 years old).
Let me address your questions separately:
Entity. I can only speak from a tax standpoint on this. I like to keep things simple and would advise you to either be a sole-proprietor or form a single member LLC. Either entity will allow you to register a name with the state, secure an employee identification number, and be taxed the same way on your 1040. You would also have the option of changing the structure down the road should the business grow and your needs change. There are tax savings to be realized with an S Corporation that we can discuss as your income grows. If you believe that your net income will exceed $50,000 this year, however, it would be worth discussing the benefits of an S Corp now.
Retirement plans. The answer depends in part on whether you will have employees. If not, then a SEP IRA is a great plan to go with. It allows you to put 20% of your income away for retirement. Whatever percentage you put into the SEP annually, you are required to do for your employees as well. I would also recommend making the maximum annual contribution to a Roth IRA. While not deductible as a business expense, the funds in a Roth IRA grow tax free and are not subject to tax when you withdraw them in retirement. The SEP IRA, on the other hand, gives you a tax benefit now and a tax bill down the road. If you will have employees and don't want to put 20% of their pay into a SEP IRA, you could go with a SIMPLE IRA. A SIMPLE is a less expensive alternative to a 401k that functions much like a 401k. The limit for SIMPLE IRA contributions for 2018 is $12,500.
Hope this helps, Bob
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