As a business owner, you might have already thought about your insurance liabilities, but what about your monetary liabilities? Simply put, a liability is a debt, financial responsibility, tax, contribution or obligation. If you’ve just started your business or are in the planning stages of yours, it’s best to know what you can expect in regards to your liabilities.
Just as you have basic individual liabilities, such as income tax, mortgage and utilities, you also have basic business liabilities. One of the most fundamental commercial debts is accounts payable, which is the money due to partners, suppliers and the like. While it makes sense that you’ll want to give your suppliers their money as soon as possible, there are situations where it’s beneficial to wait, mainly because you might be able to make a reliable investment with the money you owe and bring in more profits. Loans, income taxes, dividends payable to shareholders and notes are additional examples of basic business debts. One fundamental liability you might not be familiar with is unearned revenue. Whenever you receive a deposit or a customer pays ahead of time for a product or service, that becomes a material liability rather than a financial one.
With an accrued liability, the service or product has been received or delivered, but has yet to be paid for, recorded or invoiced. For instance, if an employee is paid every two weeks, he or she accrues those wages before they are received. What’s unique about accrued debts is they can recur, occur at one time or occur erratically. Examples of such liabilities include:
Unless you’re the sole proprietor of your business, you’ll likely have employees on your payroll. While your workforce is essential to the operation and success of your business, it can come with several liabilities. It’s best that you educate yourself on those financial responsibilities before you’ve hired your first employee. Any benefits you offer your workers count as liabilities, and the same applies to salaries, wages, taxes, withheld garnishments, 401(k) contributions and worker’s compensation. When it comes to your FICA liability, you have to think of not only the amount withheld, but also the contributions you have yet to pay.
Liabilities According to Business Type
Your business structure also has a large influence on the type of and level of responsibilities you can expect. For instance, if you’re a sole proprietor, you’re personally responsible for your debts, and you have to report your profits and income on your personal income tax return. Individuals involved in general partnerships are also liable for business debts, and they too must report their incomes and profits on their personal income tax returns. One difference with partnerships is an informational tax return needs to be filed with the IRS. If you’re involved with a limited partnership, you won’t be liable for debts if you don’t take an active role in managing your business. In regards to limited partnership income and profits, they have to be reported on the limited and general partners’ personal tax returns, and an informational tax return will need to be filed as well. Corporations are the most unique on this list. Investors and owners aren’t liable for business liabilities, and “C” corporations are taxed on their profits before they can be given out to shareholders, who are then taxed for any dividends they receive. “S” corporations aren’t subject to this double taxation because profit distributions are reported on the shareholders’ individual tax returns. Should you ever need assistance understanding your commercial liabilities, reach out for the assistance of an accountant or lawyer who is familiar with business law.
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