Once you earn your first coaching certification, and you are preparing to launch your business, you are thinking about money, finances, taxes, etc. When you follow our advice, you can limit liability, ethically and legally lower your taxes, dramatically lower your chances for an IRS audit, keep your books clean and simplify your life. You will want to get this correct from the beginning. Yes, you can just accept PayPal, and not incorporate. However, that is playing small, limits your opportunity, and is NOT what you do when you want to reach the top of the industry.
No shortcuts. Do it right. It’s easy. You just need to follow this plan. Of course, there are some variations, yet this is true 99% of the time.
You Need to Separate Your Personal Bank Accounts from Your Business Accounts
There are a few reasons why this is needed. First, the IRS wants you to do this. And, when you do, it’s far less likely you will ever face an audit. You want to avoid what is referred to as co-mingling assets. Business is business and personal is personal. When you start mixing it up, it gets confusing for your CPA/bookkeeper. It is also more difficult to identify what a legal and legitimate write-off. Therefore, the IRS frowns on co-mingling.
What is Needed to Set Up Your Business Bank Account(s)?
You will need incorporate your business to open a business bank account. This is simple, affordable, and fast. It can be done 100% online for CHEAP with places such as incorporate.com or legalzoom.com. Don’t buy all the extras. Keep is simple and affordable. You will also need to get an EIN (employer identification number). Yes, even if you are the only person in the company. Usually, one of these two entities can do this, or you can request it from the IRS website. It takes 5 minutes. Once you get your Articles of Incorporation in the mail and your EIN, you can take those documents to your bank and open your business accounts.
What Type of Corporate Structure is Best for a Coach?
It depends. You can learn more about each type and decide what is best for you. Again, this is simple. In general, you will choose an LLC (limited liability corporation) or a traditional incorporation. The thing you will “likely” want to do is select the “S-election” when filing. It’s basically ticking a box. That’s it. This means “small business”. In short, with a traditional “C-corp” you are taxed at the corporate level and the personal level (yeah, taxed twice). When you choose the “S-election” when filing your incorporation documents, you are setting yourself up to only being taxed once at the “individual level”. It’s called a “pass through” entity. In general, this is very wise choice for coaches and saves you even more. It cost nothing to do this. And the “S-election” can be chosen with the traditional incorporation or an LLC.
Check or Savings Account?
Both! You need both. You need a business checking account because that’s where all your earnings will go first. It is the first stop. From that point, you will allocate X amount each month to business savings. You will pay yourself in the form of an “owner draw” or as the only employee of your company and receive X amount each month as employee of your own company. Talk to your CPA or accountant about why you would want to consider either. Then, from your personal checking account (where your “paycheck” from your business checking goes), you can allocate money to your personal checking account.
ALL INCOME goes to BUSINESS CHECKING
BUSINESS CHECKING sends to BUSINESS SAVINGS + PERSONAL CHECKING.
PERSONAL CHECKING sends to PERSONAL SAVINGS
If you’ve arrived at this point in the article and need to take a deep breath, it’s ooooook! This is quite simple, affordable and the right thing to do. All top coaches do this. All successful business owners do this.
Somethings to Consider When You Name Your Business as You Incorporate.
When you name your company, you want to consider a few very important long-term goals and objectives. If you use a very specific name, it could limit you in the future. If it is YOUR CITY coaching (as an example), and then you expand online or to multiple physical locations, that won’t work. You may want to consider using your name and then “LLC” as an example, that can work well. However, if your plan is to sell the business in the future, that could pose an issue. The name should be related to a niche yet give opportunity for growth.
Remember, you can also file what is known as a DBA or fictitious name that you can use as an alias of sorts for your corporation. Just remember, simple is better. Always.
Pay Yourself Less
This may sound odd or counterintuitive but consider what we are saying. Pay yourself less than you may like. Here’s the logic. Have your coaching business pay as many of your expenses as possible so you maximize your legitimate tax write-offs. This is the right way to do things even if it sounds foreign to you. Your company should own your car. If you have a car lease, your company should pay for it. If you buy a new car, your company should own it. These are legal and justified write-offs. Your cell phone and Internet access should also be paid for by your company. Many, if not all, travel can be legally associated with your business in one way or another. Your company (business checking account) should pay for this. There is much more, but you get the idea. You can always discuss with your CPA or bookkeeper.
How Does Having Your Business Own Things Save You Money?
If you do not incorporate, you cannot always structure things in a way that allows for tax reduction. EXAMPLES: If you pay for everything personally, you must pay yourself more money which causes you to increase your personal income (thus tax burden). If your company owns/leases/pays for legitimate write-offs, you can reduce your monthly income from $5000 to $2500/month (as a simple example). Everything still gets paid for, but the when the company pays, your taxable income is cut by 50%.
As a result of using this legal, ethical, appropriate, and even desired method by the IRS, you will save thousands a year in taxes. That money can be saved and invested for your future. That’s how you get ahead.
In closing, think of this. You want to be a success. You want to do things correctly. Investing $150 into an online incorporation service, and following this plan, can save you thousands and thousands of dollars in the next year.
You can invest in continuing education and career development with all that money you’ll save.
We’ve been here to help you since 1992. And we’re still here to guide you each step of the way.
Learn about the best way to set up your coaching home office.
Here’s another related article from our NESTA division. It discusses tax deductions and tax planning for trainers and coaches.
