Expert: Mike Wellman - 10/20/2007

Question
We started our own Excavating Business in April.  Pretty much our bookkeeper has said that the first few years you don't pay taxes (or not very much) because I guess we have just as many expenses/write offs to offset the taxes.

Anyways, we want to know about after the first few years.  If we are making just enough money to pay the business bills right now, once we have to start paying taxes out of the money I don't know how we will afford to.  Is that why most business's fail?  Once the taxes start?  We have no employees and are a LLC.

We are not quite sure how the business thing works out.  By after a few years we should be generating more profit and thus it won't hurt to pay some taxes?  Is that the idea?  Or, could it be that after a few years we may have equipment paid off, etc? that will help?

Can you advise?

Thanks

Answer
First of all, your bookkeeper may be very wrong. You may very well pay taxes from the very first year. If you have $400 or more of profit, you will begin paying taxes. I do not know if you will have any profit but it is a dangerous assumption to make that you won't and ignore the tax implications.

If you are pulling enough money out of the business to pay all your household bills - you are probably making a profit. It may not seem like it. You may feel poor all the time. But you may well be making profit - for which you need to pay tax.

Most businesses fail due to under-capitalization. This typically occurs at startup and for the first year. However many are under-capitalized during periods of rapid growth. Growth is expensive and if not properly handled, it can put a business under. In some case, success can be your undoing.

You need to get a competent professional to advise you.