Accounting Help

Question

Monica Porter loves photography and wants to start her own company. She is single, 26 years old, and lives in an apartment in Nicetown. She has a job as a clerk in a grocery store that currently pays her living expenses. Her dream is to be a portrait photographer specializing in events such as Weddings, Birthdays, Graduations, etc. She has saved $10,000 to start this endeavor. She knows nothing about accounting and has hired you to provide her with accounting services as well as guidance in starting this business. This first task is to determine what business organization entity she should choose. Please explain the different business formats and which one you would suggest for her business which will be named “Portraits by Porter” (PBP).

Answer 1

Regarding answer #1, an LLC may be better than a Sole Proprietorship.

 

With an LLC, the company's money and bills are distinct and separate from your own assets. If the business does fail, or if you have a bad tax year, with an LLC your personal funds cannot be taped (by the IRS) to pay for business expenses or tax liabilities.

 

It's an issue of managing risk. Spend a bit more now (to maintain an LLC), with the benefit of protecting your personal assets.

Answer 2

Broadly speaking, there are four main types of business entities and there are variants of these four main types, depending on the state. Main types are: 

1.  Sole Proprietor

2.  Partnership 

3.  Limited Liability Company 

4.  Corporation 

 

There are four main concerns to be addressed before choosing the appropriate business entity. Main concerns are: 

1.  Investors

2.  Limited Liability

3.  Cost of Financial Reporting

4.  Taxation 

 

There are 1000 page books on these issues, but I think you should suggest a Limited Liability Company (LLC). It:

1.  limits liability for Ms Porter,

2.  for investors (just Ms Porter's $10,00 and no other personal assets),

3.  there are usually sales reporting requirements but not a full financial reporting requirement on a quarterly basis, and

4.  provides the use of accruals accounting and an appropriate reporting year-end (maybe have the year end on Jan 31 after the Christmas Family Portrait rush). 

 

Sole Proprietorship could also work. Even less reporting standards and can report all income and expenses through personal tax form.