New business

[EK241]

I’m opening up a private therapy practice and will be opening up a business bank account beforehand. I have some questions and appreciate any insight. 

1. If I don’t touch the business bank account for the first six months or so, will I be penalized down the line?

I wondered if I don’t touch the business account, that it could look like I don’t have expenses and am only accruing profit, when I would simply rather live off my savings in the beginning and allow the business account to grow
2. When it comes time that I do need to start paying myself,  what are some ways that sole proprietors do this? Will my taxes change depending on how much I pay myself?

3. Can I choose to incorporate in the future in a state without income tax and only pay federal taxes? Or if my clients are located in a certain state, will I need to pay taxes to that state regardless, in which case I’m not sure there would be a benefit to incorporate elsewhere 

4. Would also appreciate the most simple explanation of what tax deductible means

[JBedford]

Hi, @EK241 , thanks for the questions! 

1) Not really a tax question, but you're not penalized per se. If you have business expenses, just make sure you have documentation of some kind, e.g. receipts. However, all accountants (including me) are going to tell you to make business purchases from your business account. Commingling business and personal expenses is just not a best practice. 

2) Sole proprietors do no really "pay themselves" per se. From a tax perspective, you and the business are the same entity. You just have the choice of what to do with your profits: spend on business expenses, spend on personal expenses, or don't spend at all. The only thing I would say, related to what I said above, is that I would move the money from the business account to a personal account if I wanted to use it on personal expenses. But it makes no difference from a tax perspective. 

3) As a general rule, you have to pay state tax in any state that you do work in. 

4) "Tax deductible" refers to an expense that decreases your taxable income. For example, if I have $10,000 in business income, but had $1,000 in business expenses, then the net taxable income is only $9,000. 

Hope this helps, please let me know if not!

[EK241 · Accepted solution]

Thanks so much for all of this. Everything you said makes sense. Now I am wondering whether you can summarize the benefits of being a sole proprietor vs a pllc or a different entity as far as taxes are concerned. Thank you again 

[JBedford]

Hi again, @EK241 ! We're not allowed to advise on choosing a business entity, as that's outside of our scope. With that being said, the main advantage of being a sole proprietor is simplicity. I would advise consulting with a local or online tax accountant or attorney who advises on such matters, if you're considering a change in entity. I can also say that an LLC is generally a "disregarded entity" for tax purposes, so it has no tax effect. Hope this helps!