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“Cost of goods sold” (COGS) refers to the cost of producing the goods sold by a company. Calculating COGS involves knowing the amounts you spend to create your products, which helps in determining whether your business is making a profit. Cost of goods sold is sometimes referred to as “cost of sales.”

What Is Cost of Goods Sold (COGS)?

Cost of goods sold comprises the outlay for materials and labor that are directly used to create the product. COGS does not include indirect expenses, such as sales or distribution costs.

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Components of COGS

Understanding the meaning of COGS enables you to manage your business better as you zero in on the relevant cost components. The expenses included in COGS are those directly associated with the production or acquisition of a company’s merchandise.

Some COGS-related expenses are direct raw materials, direct labor costs, manufacturing overhead, and direct costs of production. COGS does not include general and administrative expenses, marketing, utilities, equipment purchases, salaries of management-level employees, insurance premiums, or certain other business liabilities.

Raw Materials

The price of raw materials, such as basic manufacturing supplies or substances, is a major factor in the COGS. The calculation might also include materials for packaging, such as boxes for shipping orders. Businesses that sell goods might have high materials costs, while businesses that sell services would likely spend much less or nothing on materials.

Labor Costs

Cost of goods sold also includes labor costs, including direct labor for creating or assembling products. Administrative costs or salaries of management-level employees are not part of COGS.

Manufacturing Overhead

Another set of costs to add into the COGS is the manufacturing overhead. As with raw materials, the cost of manufacturing overhead (also known as factory overhead) will be higher for companies that fabricate or assemble products than for companies that provide services. Note that, if you’re financing business equipment, expenses related to the loan are not part of COGS.

Recommended: 15 Types of Business Loans To Consider

How To Calculate COGS

Calculating COGS can be useful as part of a break-even analysis, and you can reassess the figures monthly or quarterly to track the company’s progress. The following formula shows how to calculate the cost of goods sold.

COGS Formula and Example Calculation

The COGS formula is:

Cost of goods sold = (beginning inventory cost + inventory costs) − ending inventory

The components are:

•  Beginning inventory: the cost of the goods in the company’s inventory at the beginning of a given time period. This is not the same thing as inventory costs.

•  Inventory costs: additional costs incurred in purchasing or creating more inventory during the time period.

•  Ending inventory: the cost of the inventory that the company has left at the end of the time period.

There are several ways to determine inventory cost. The inventory cost accounting method that your business chooses will affect its COGS calculation; each business may use a different method. The four common inventory costing methods are weighted average, LIFO, FIFO, and special identification.

•  Weighted average: This is one of the simplest methods, where the outlay for the entire period determines the inventory cost. The date that a given unit of inventory was purchased or produced doesn’t matter in the weighted average method.

•  LIFO: This acronym stands for last in, first out. In this method, the newest inventory is sold first.

•  FIFO: The opposite of LIFO, this stands for first in, first out. In this method, the oldest inventory is sold first.

•  Special identification: With this system, each unique unit is tracked and has its own cost. Each unit may be labeled with a serial number.

An example of calculating COGS would be as follows:

•  Business XYZ started the month with stock that had a cost of $10,500 (the beginning inventory).

•  During the month, the business spent $3,000 for the purchase of materials to make new products (the inventory cost).

•  At the end of the month, XYZ had $4,100 worth of goods in stock (ending inventory).

To calculate the cost of goods sold for the month, the formula would be ($10,500 + $3,000) − $4,100 = $9,400.

Why COGS Matters for Your Business

Cost of goods sold is recorded as a business expense on income statements. COGS may be used by investors or managers to estimate a company’s bottom line. A lower COGS means higher net profits (with all other things being equal). Also, the details of your COGS analysis are likely to be relevant to lenders if you apply for a small business loan or business line of credit.

Note that service companies may not have any cost of goods sold at all. Service-only companies don’t have goods to sell. They also do not have inventories. Examples of service-only companies include law offices, real estate appraisers, business consultants, and accounting firms.

Ways To Reduce COGS

Companies can reduce their COGS through purchasing cheaper raw materials or increasing efficiency in the production process to lower costs.

COGS can also be manipulated, either intentionally or mistakenly. Some ways might include overstating discounts, overstating returns to suppliers, overvaluing inventory on hand, allocating to inventory higher manufacturing overhead costs than those incurred, altering the amount of inventory in stock at the end of an accounting period, or failing to write off obsolete inventory. COGS will then be underreported, leading to a falsely high gross profit margin and an inflated net income.

Common COGS Calculation Mistakes

Many people use “cost of sales” and “costs of goods sold” interchangeably. But the calculations aren’t necessarily the same.

•  Cost of goods sold involves the direct costs associated with producing goods — or acquiring inventory that has been sold — during a specific time period. Examples include raw materials and pay for factory workers.

•  Cost of sales includes the direct costs of goods sold plus any other costs related to generating revenue — generally a wider range of expenses than COGS.

COGS is used for manufacturing and cost of sales is more appropriate for companies that provide services.

A related mistake in calculating COGS is factoring in costs that should not be included. Some examples: general and administrative expenses, marketing, utilities, equipment purchases, rent or mortgage payments, salaries of management-level employees, or insurance premiums. An accountant will help you categorize your expenses in order to get the most accurate data.

The Takeaway

Cost of goods sold represents the sum of a business’s direct costs for producing the merchandise it sells. The monthly or quarterly calculation includes any direct costs that a company incurs for manufacturing, purchasing, or selling products. It’s worth tracking this information, as lowering COGS can boost net profits.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is included in the cost of goods sold?

Costs of goods sold includes the direct outlays of a business for expenses closely associated with the production of the goods it sells. COGS includes things like direct labor, direct materials, direct costs of production, and manufacturing overhead.

How does COGS impact business profitability?

COGS affects a company’s profits as COGS is subtracted from revenue to show gross profit. If COGS increases, the business will have less profit. As a result, businesses try to keep their COGS low.

Is COGS the same as expenses?

COGS includes the costs and expenses that are directly related to the production of goods. However, COGS does not include all expenses. Indirect expenses, such as sales force costs, are not included in COGS.

Can service-based businesses calculate COGS?

Service-based businesses usually cannot calculate COGS. Companies that offer only services don’t have goods to sell, and they don’t have inventories. Examples of service-only companies include law offices, real estate appraisers, business consultants, and accounting firms. Instead of COGS, these businesses can calculate “cost of sales.”

How do I reduce my cost of goods sold?

Companies can reduce their COGS through cheaper raw materials or more efficient production.

Photo credit: iStock/svetikd

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSMB-Q424-109

Timely cash flow is a crucial part of running a successful business, and the payment terms you negotiate as both a vendor and a customer have an impact on your company’s revenues. One key factor in cash flow management is how much time the customer has to pay their bill. Businesses use the phrase net 30 on invoices to signify that payment is due within 30 days.

Learn more about the meaning of net 30 and how using that payment period can affect your business.

What Is Net 30?

Net 30 is a shorthand phrase used to indicate a payment deadline. It specifies how many days the client or customer has to pay the invoice. Net 30 is one of the most commonly used payment time frames among small businesses in the U.S. Other options include net 15, 60, or 90.

Here’s a full net 30 definition, plus examples of how using net 30 compares to other options.

Definition and Explanation

A net-30 payment term gives the customer 30 days from the billing date to pay the outstanding balance. Thirty days provides time to get the invoice approved and the payment issued by the client’s accounting team. Typically, a net-30 invoice refers to calendar days, meaning that weekends and holidays count towards the due date.

It’s important to be clear on when the 30-day period begins. Many consider the invoice date to be day one, but others believe the clock starts ticking on the date the invoice is received by the customer.

Either convention is okay, but it’s crucial to indicate clearly which one your company follows. This is especially important if you mail out your invoices instead of sending them electronically, as there may be several days’ difference between the day you send a bill and the day the customer receives it.

What does net 30 mean in practice? Let’s say your small business sends out all its invoices at the end of each month. In this case, we’ll say invoices are sent on Oct. 30. The due date would be Nov. 30, even though there is a federal holiday during the month.

Comparison With Other Payment Terms

Though net 30 is a very common payment term, you may come across (or decide to adopt) other time frames that affect your company’s cash flow.

•  Net 15: For a vendor, net 15 billing gets you paid faster. But clients may have difficulty executing payment so quickly, especially if it’s a larger company with multiple approval levels in place.

•  Net 60 or Net 90: These longer terms can cause cash flow issues for a small business waiting for payment. Net 60 and net 90 are more common among larger companies.

It’s wise to analyze your monthly revenues, examine when customers typically pay their invoices, and discuss payment terms with suppliers. That way you can figure out what net terms suit your small business.

Be sure your payment setup works with your business model. Cash flow issues are a major reason for the high percentage of businesses that fail in their first five years.

How Businesses Use Net 30

Businesses use net-30 payments in various ways, depending on how they operate best.

•  Cash flow management: Businesses often benefit by paying their vendors via net-30 terms, rather than immediately. That way, they can keep cash on hand for a longer period of time, making it easier to juggle other financial commitments and inventory.

•  Business credit: A net-30 bill essentially serves as a free, short-term loan or credit line. If your vendor offers net-30 terms on an invoice, you can spread out your payments and escape the interest charges you’d incur by using a bank loan or credit card.

•  Customer relations: If your business sends out net-30 invoices, the long payment term could potentially help you entice or retain customers.

Advantages of Net 30

The advantages of net-30 invoices vary, depending on whether your business is the buyer or the seller in the transaction. Here are a few aspects you might consider when determining whether to use net 30 when dealing with your customers or vendors.

Benefits for sellers include:

•  May attract more clients or customers: Net 30 is a favorable payment term that might not be offered by your company’s competitors.

•  Pushes December revenue into the new year: Collecting the debt a month later could lower the income you have to report on the current year’s IRS Form 941.

•  Allows you to add an early payment discount: Customers might settle up faster if you give them an opportunity to pay a little less.

Some potential pluses for buyers might be:

•  Extending cash flow: Having 30 days to pay a bill may ease the pressure of business purchases.

•  Scoring possible discounts for early payment: Lowering the overall cost of goods or services could increase your profit margin, everything else being equal.

When deciding on payment terms, weigh the importance of such factors, especially if you’re the seller. You’ll want to be sure the health of your company isn’t harmed by longer invoice terms.

Potential Drawbacks of Net 30

Sometimes it’s a disadvantage for a business to issue net-30 invoices. Here are some possible situations.

•  Late payments can delay a closing date even further. Even waiting 30 days may create cash flow challenges. If there are issues, a small business loan or line of credit could be a fallback to help get you through the month.

•  Having to follow up on extended payment terms may slow down processing. Revisiting an outstanding bill could increase your business’s administrative overhead, whether it’s done manually or with invoicing software.

•  Early payment discounts could hurt your overall profitability. Make sure any discounts are comfortably within your profit margins.

Implementing Net 30 in Your Business

If you decide to use net30 payment terms for your business, communicate this billing information when you first engage a new client. You may not have the capacity for this if you run a sole proprietorship or other type of small business — you’ll want to make sure your cash flows easily throughout the month.

If you have standalone contracts with your clients, include all payment instructions in there as well. This makes your agreement more formal and gives you legal recourse if necessary. A contract is also a good place to cite any late fees you’d charge after the 30-day window closes.

You should also include these payment terms on the invoices you send. State directly on the invoice that payment terms are net 30, and be sure to include the due date so there’s no confusion.

Alternatives to Net 30

For added flexibility, you may want to think about certain variations on the net-30 payment term.

•  Early payment discounts: Along with the net terms on your invoice, you may want to give the customer a price break for paying the invoice early. Usually the discount is a small percentage of the total invoice amount. For instance, the message 2/10 net 30 on an invoice means you’ll give the customer a 2% discount if they pay within 10 days of receipt.

•  End-of-month (EOM): An end-of-month term sets a due date that’s a certain number of days after the month is over. For instance, an invoice sent in July reading “Net EOM 10” would be due 10 days after July 31.

•  Financing options: If you’re a vendor who needs money soon, you may want to look into invoice financing. This is when a vendor taps into the value of outstanding invoices, selling them to a financing company for as much as 90% of their worth. The financing company collects the money from the customers and remits the rest (minus a fee) to the borrower once the bill is paid.

The Takeaway

The payment term net 30 is common on invoices in the business world. It means businesses receiving goods or services have 30 days to pay for them. This arrangement has pros and cons, depending on the details of your business. Before you start offering this option to clients, make sure you have the cash flow to support the slight delay in payment.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Photo credit: iStock/AndreyPopov

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q424-043

If you’re a licensed professional aiming to set up your own practice or firm, you may have seen the acronym PLLC. What’s the meaning of PLLC? The initials stand for “professional limited liability company,” which is a type of business entity designed for professionals such as doctors, architects, or lawyers. A PLLC business structure offers liability protection and some tax incentives to those who qualify.

However, the rules governing business entities tend to vary by state. In fact, forming a PLLC may not be an option in your state, even if you’re in a profession that would benefit from one. If you’re considering starting your own PLLC, here’s what you need to know.

What Is a Professional Limited Liability Company?

PLLC stands for “professional limited liability company.” It’s one of several types of business entities you may be able to choose as a structure for your enterprise.

You may have heard of an LLC; a PLLC is very similar. So before we go further, here’s a cursory refresh on LLCs.

First, let’s define LLC. The acronym stands for “limited liability company.” This means that LLCs protect business owners from personal liability. If the business is sued or cannot service its debt, the owners’ personal assets are in no danger of being seized by courts or creditors. Debts and obligations typically belong to the LLC, not the business owners.

There are certain tax benefits to an LLC as well. One of the biggest is that the LLC pays no income taxes as a business entity; instead, the money is taxed only once, on the members’ individual tax returns.

At present you can form a PLLC in the following states: Arizona, Arkansas, Colorado, District of Columbia, Florida, Idaho, Iowa, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, and West Virginia.

Who Can Form an LLC?

Just about anyone starting a business can form an LLC. Some states, but not all, require that LLC owners be at least 18 years old; one reason is that minors may not be legally bound by contracts.

The process of forming an LLC generally involves selecting the state you’ll be operating in, picking a suitable name and a registered agent, and filing articles of organization with the state government. You also need an employer identification number, a state tax ID, and an operating agreement.

As discussed above, PLLCs are designed specifically for professionals, such as architects, doctors, or lawyers. Depending on your state and your line of work, you may not need to form a PLLC. An LLC may suffice.

Recommended: Comparing LLC Business Loans

PLLC vs. LLC: Key Differences

PLLCs stack up against LLCs mainly in these ways:

•  PLLCs are intended for licensed professionals; LLCs have no such restrictions.

•  Some states mandate that professionals whose occupations require licensing may not elect LLC status; they must be PLLCs.

•  Some states, such as California, don’t recognize PLLC status.

•  A PLLC structure can reinforce compliance with state regulations. LLC owners may not need the additional structure.

•  An LLC gives members liability protection against the business’s debts and obligations. PLLCs additionally protect members from others’ malpractice lawsuits.

LLCs do not protect members from malpractice claims filed against their fellow members. But a PLLC does. Note that, with a PLLC, only the member who is sued for malpractice is liable for any penalties. In any event, getting liability and malpractice insurance is usually a wise move.

So which business type wins the PLLC vs LLC debate? It depends on your profession and your needs. Check with your secretary of state or equivalent — state laws may require you to choose one over the other. If you’re unsure which option is best for your situation, speaking with a CPA may be beneficial.

PPLC vs Other Business Entities

A PLLC isn’t your only option as a business owner if you’re a certified or licensed professional. You may also want to consider a general partnership, limited liability partnership (LLP), or professional corporation (PC).

Here’s a brief overview of these business entities:

•  General partnership: In a general partnership, every partner shares in all of the responsibilities, assets, profits, and liabilities. At the same time, compared to an LLC or PLLC, a general partnership can be easier to start, maintain, and dissolve. If you’re in a business where you make joint decisions with trustworthy partners and the chances of litigation are low, a general partnership may be suitable for you.

•  Limited liability partnership (LLP): An LLP is a type of general partnership in which each person is protected from the debts or mistakes of their partners (limited liability), but members are able to be flexible in dividing up responsibilities and control. Compare the requirements for LLPs and PLLCs in your state; they may differ widely.

•  Professional corporation (PC): In your state, you may have the option to create a professional corporation. Like a PLLC, a PC (sometimes known as a professional service corporation, or PSC) requires the business owners to meet state requirements for professional licensure.

However, as a corporation, a PC is bound by corporate tax and compliance rules. Owners of PCs are considered shareholders and may be obligated to appoint a board of directors, elect officers, and maintain a certain level of insurance coverage.

Benefits of Forming a PLLC

There are a few reasons why forming a PLLC may be a good idea if you meet your state’s requirements.

•  PLLC members are not personally liable for any business debts or lawsuits that may occur as a consequence of practicing their profession. So if the firm takes out a small business loan, your personal assets are not on the line.

•  If the PLLC has multiple members, no single member is jeopardized by any malpractice claims against other members. As noted above, each member is responsible only for their own malpractice issues.

•  Being a PLLC can boost your company’s professional image. Meanwhile, behind the scenes setting up a PLLC can be fairly simple, and, depending on the state, fees may be minimal.

•  A PLLC gives its members flexibility with their tax options. A multi-member PLLC can choose to be taxed as a pass-through entity or as an S corporation. If the PLLC elects to be taxed as a pass-through entity, its income and losses are recorded on each individual’s personal tax return. This means the company effectively avoids corporate taxes.

A PLLC’s members may find that paying taxes as an S corporation provides certain deductions and benefits. It’s a good idea to consult an accountant or other tax pro in making this decision.

Potential Drawbacks of PLLCs

The biggest drawback of pursuing a PLLC status is that your state may not allow this designation. You can find out by visiting the website for your state’s secretary of state or equivalent.

Next, even if PLLCs are allowed in your state, you may not be eligible to create one. Some states only allow certain professions to become PLLCs. A typical list might include certified public accountants, architects, chiropractors, dentists, doctors, engineers, lawyers, optometrists, therapists, and veterinarians.

You can see if you’re eligible to form a PLLC by checking with your state government.

Formation Process for a PLLC

Individual states may have slightly different processes for forming a PLLC, but overall the process is likely to involve the following steps:

1.   Gather your credentials. Make sure the PLLC’s members all have valid, up-to-date professional licenses from the state licensing board. You’ll likely need to get a certificate of compliance from the board to submit as part of your application.

2.   Name your PLLC. Pick an appropriate and distinctive name for your PLLC. To see if anyone else has laid claim to that name, search your state’s website for a corporate name registration page. By the way, your PLLC’s business name does not have to match the DBA (“doing business as”) name you use to advertise your business.

3.   Get an employer identification number (EIN) from the IRS. Your PLLC will need this to do business.

4.   Hire a registered agent in your area. This person or company will receive official documents on behalf of the PLLC.

5.   File your articles of organization. You’ll need to provide your business’s name, members’ contact information, registered agent’s name and address, and company purpose. Your state may require additional information. Once you’re ready you should be able to file online, in person, or by mail.

6.   Pay the filing fee. The amount of the fee varies by state. For example, Virginia’s filing fee is $100; in New York, it’s $200.

7.   Submit additional documents if necessary. A certificate from your professional licensing board, mentioned above, will be one of them. Others might include an operating agreement or additional licenses, depending on your profession and state requirements.

The Takeaway

A PLLC, or professional limited liability company, is a type of business entity designed for members of certain licensed professions. Like an LLC, a PLLC provides liability protection in case of litigation. Unlike an LLC, a PLLC must provide proof of licensure or certification. You may want to consult a CPA to see if creating your own PLLC is the best option for your particular situation.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Photo credit: iStock/Ivan-balvan

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This article is not intended to be legal advice. Please consult an attorney for advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q424-044

Most businesses with employees must file a quarterly IRS report that details the employment taxes that they owe. They must submit this information on IRS Form 941, also called the Employer’s Quarterly Federal Tax Return. Companies who don’t file it as required may face penalties.

What Is IRS Form 941?

Unlike individual taxpayers, who typically have to file just one tax return per year, many businesses are required to file quarterly tax returns. Companies use IRS Form 941 to calculate and record certain taxes they’ve withheld from employee paychecks over the preceding three months. The form reports the total federal income tax and Social Security and Medicare payroll taxes paid by the employer.

When a business fails to file its IRS Form 941 on time, or if it underreports its tax liability, the company can be subject to IRS penalties. For example, the IRS can impose a penalty of 5% of the outstanding tax bill for every month an overdue business return hasn’t been submitted, as well as an additional 0.5% monthly fee for late payment, for up to five months.

Who Needs to File Form 941?

Nearly all businesses that have employees are required to file a Form 941. There are, however, a few exceptions. Companies that usually aren’t required to file an IRS Form 941 include:

•  Seasonal businesses that don’t have any employees during the past quarter

•  Businesses that hire only farmworkers

•  Employers of household employees, such as housekeepers and full-time childcare workers

Recommended: What is a Sole Proprietorship?

Understanding Form 941 Sections

To fill out IRS Form 941 accurately, you need to know and understand the requirements of each section. The top section is for employer identification. It includes your employer identification number (EIN) plus your personal name, your trade name, and your address. There’s also a space to indicate which quarter you’re reporting on.

The rest of the form is divided into five parts.

•  Part 1: This is where you provide information about the business’s workers, including the number of employees, their wages, and details about the taxes withheld. It shows you how to calculate the tax that’s owed, along with any special adjustments. The numbers add up to either a balance due or an overpayment.

•  Part 2: This segment asks about your deposit schedule and tax liability for the quarter. In Part 2, you take the balance or overpayment from Part 1 and compute your total tax liability for the quarter. This doesn’t take into account adjustments like small business tax deductions and business tax refunds.

•  Part 3: Here you record if your business has closed or has stopped paying wages. The form also asks if you’re a seasonal employer. If none of those situations apply, you don’t have to complete this section.

•  Part 4: This section asks you to specify an employee, a paid tax preparer, or another person who is authorized to discuss this return with the IRS. This can be helpful for business owners who don’t prepare their tax returns themselves, but you are not required to provide this information.

•  Part 5: At the bottom of page 2, you’ll need to print your name, the date, and your best daytime phone number, and sign the form. Below that is an optional section in which paid tax preparers (that is, someone who is not in your employ) would enter their contact information and sign as well.

Recommended: What Percentage of Businesses Fail?

Step-by-Step Guide to Filling Out Form 941

Before filling out the form, you’ll want to look over the IRS’s Form 941 instructions. After that, gather the necessary basic information, starting with the business’s address and EIN. You’ll also need to tabulate the number of employees and the total wages and tips they received during the quarter.

Next, you’ll calculate or enter the total amount of federal income taxes, Social Security tax and Medicare tax you’ve withheld from all of your employees’ wages during the quarter. Typically your company’s payroll or accounting software will track these numbers and can give you the data. (It may even be able to complete Form 941 for you.)

Alternatively, you can get these numbers from:

•  Your monthly or semiweekly employment tax deposits

•  Your payment history in the Electronic Federal Tax Payment System (EFTPS)

•  Your bank account statements

If you’re making monthly deposits, it may be convenient to align your invoicing with that schedule. Consider adopting Net 30, a common business practice that encourages creditors to pay you within a month.

Regardless, with these figures, you’ll be able to fill out Part 1, and the results you get there will make completing Part 2 very easy. Parts 3, 4, and 5 are very simple and should only take a few minutes.

Calculating and Reporting Payroll Taxes

To calculate and report your payroll taxes correctly, the key parts of Form 941 are lines 5a, 5b, 5c, and 5d. That’s where you report the wages and tips that qualify as taxable for Social Security and Medicare, and multiply those amounts by the correct percentage. Pay special attention to where the decimal point is on the multiplier.

Filing and Payment Options

If you’re wondering where to send Form 941 once complete, you have two filing options. You can mail it to one of the four IRS addresses listed in the instructions. Or you can submit the information online using the Modernized e-File (MeF) system available on the IRS website.

To make a payment, you can send a check or money order by mail using the Form 941-V voucher, which ensures that the IRS will process it correctly. Alternatively, you can pay electronically with a credit card, debit card, or digital wallet using one of the three payment processors authorized by the IRS.

If you’re having difficulty paying your business’s quarterly taxes, it might be worth talking to an accountant about the pluses and minuses of covering the debt with a small business loan.

Common Mistakes to Avoid When Filing Form 941

Make sure that your filing is free of mathematical errors, such as inaccurate wage and tip reporting.

Per the IRS, use the fractions of cents line (line 7) only for rounding issues related to the employee share of Social Security and Medicare taxes.

And remember, if you’re a seasonal employer and you didn’t have any employees this quarter, then check the box in Part 3, on line 18. Doing this accurately can help you avoid a small business audit.

Overall, rest assured that errors on Form 941 are common enough that the IRS has a form just for amending it: Form 941-X.

The Takeaway

Employers are responsible for calculating and paying employment taxes each quarter. On the federal level, this typically involves IRS Form 941, which records the amounts your business will pay for employees’ income tax and payroll taxes. Understanding the details and deadlines of this form will help you meet your tax filing and payment obligations, while also avoiding penalties whenever possible.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What does IRS Form 941 do?

Form 941 is the Employer’s Quarterly Federal Tax Return, used by businesses to calculate and report employee wages and the Social Security and Medicare taxes paid by the employees. It also indicates whether an additional tax payment is required for the quarter.

Do I have to file a Form 941 if I have no employees?

No. Businesses that don’t have employees don’t have to file the 941 form. This includes seasonal employers that don’t need workers during a particular quarter.

What happens if you don’t file a Form 941?

If a business is required to submit Form 941 but doesn’t, it risks penalties. The IRS will charge a failure-to-file fine of 5% of the unpaid tax total, plus 5% for each additional month the tax remains outstanding, up to a maximum of 25%. The IRS also charges interest on penalties, calculated based on the day the taxes were due.

The business could also face a failure-to-pay penalty of 0.5% of the unpaid tax amount, assessed each month.

Photo credit: iStock/Jertography

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Articles of organization are official documents that you must file with your state to set up a limited liability company (LLC). Each state will have its own set of information requirements, though certain basic details are common. To help you file your LLC’s articles of organization with confidence, here’s a quick overview.

Definition and Purpose of Articles of Organization

The document you use to apply for an LLC designation for your business is known as the articles of organization. The Secretary of State typically supplies the necessary forms for your state. In some states, the office may be known by another name, such as Arizona’s Corporation Commission.

The form is often a single page, including just a handful of questions, though you are free to include additional details. You can even find a suitable online template to draw up your own document, as long as the pages you submit include all the required facts for your state.

The articles of organization that you file are the official basis of your LLC designation. Business owners who want to operate in multiple states as an LLC vs. a sole proprietorship must file articles of organization in each state where they plan to do business. This is known as foreign qualification.

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Key Components

Your state will ask for some identifying information when you file articles of organization for your LLC. Though each jurisdiction has its own list of questions, articles of organization typically require these details:

•  The LLC’s name: Once you’ve chosen your LLC’s unique name, you’ll register it as part of the articles of organization. At the state level, you’re identifying it as a business entity name. The Small Business Administration also suggests protecting your LLC’s name via registering a trademark at the federal level, a “doing business as” (DBA), and a domain name for your business website address.

•  The LLC’s business address: Your articles of organization should include a principal office address where official communications from the state can be sent.

•  Member names: All of the owners of an LLC are considered members. These could be individuals or other business entities. If you’re the only owner of the company, depending on the state, you’ll be creating an LLC or a single-member LLC (SMLLC).

•  Registered agent’s name and address: Your articles of organization will also include the name and address of your registered agent. The registered agent accepts documents and official correspondence on the LLC’s behalf. This role may be filled by a person or a company. Some states prohibit the LLC to act as its own registered agent — but even if your state allows it, some experts suggest that doing so could introduce privacy issues and other problems.

How Articles of Organization Differ from Operating Agreements

By filing articles of organization, you officially register with your state the formation of your LLC. It contains the basic outlines of your business entity, including company names, members, and contact information. The document is considered public record as soon as it’s filed. The official information is also relevant for the IRS, as choosing to form an LLC gives you certain tax benefits along with reducing your personal liability.

Your operating agreement, in which you record additional rules for your LLC, is an internal document that describes how the company is to be run. It sets out all the details about ownership percentages, members’ duties and powers, distribution of profits and losses, and the like.

Many states don’t require that you file an operating agreement, but it’s important to create one — especially if your LLC has multiple owners. Spelling out the rules now can head off conflicts later, so many experts suggest hiring a professional to draw up the agreement. This may mean you have to loan money to your LLC to cover the cost.

Having an operating agreement in place can also be helpful if you apply for a startup loan later. Lenders considering your application will want to know the specifics of how your company works.

Recommended: Comparing LLC Business Loans

Filing Process for Articles of Organization

Once you have all of the information required for your articles of organization, it’s time to file the document with your state. Here’s what to expect at each step of the process.

1.   Check your state requirements. Most LLCs are governed by the Secretary of State within your state. Visit the agency’s website to find out how to send in your articles of organization. There may be an online form you can fill out, a mailing address, or both.

2.   Complete any prerequisites. Find out what else your state wants you to do in order to launch your LLC. For instance, you may need to reserve a business name in advance.

3.   Pay a filing fee. Most states require you to pay a filing fee to form your LLC. This is considered a business expense, so you can pay from your business bank account if you already have one.

4.   Sign and submit your articles of organization. After completing all the information required by the state, one member can sign and submit the articles. This can be done online or through the mail.

Within a few days, you should receive an approval from the state; it’s often faster if you apply online. Once approved, you can register for an employer identification number (EIN) with the IRS. Then you can open bank accounts for your LLC and set up a business line of credit.

State-Specific Requirements

States each have their own exact requirements for articles of organization for an LLC. The fees and forms will be different in every state, so it’s important to research how LLCs are formed in the areas where you intend to do business.

Also note that some states require a different structure for professional service firms. Instead of an LLC, you may need to form a professional limited liability corporation, or PLLC. Licensed professionals such as attorneys and dentists may fall under this category, depending on your state.

Common Mistakes to Avoid

Here are some common mistakes to avoid when filing your articles of organization with the state:

•  Missing information: Applying online can help you avoid submitting your form with incomplete details and prevent illegible handwriting from slowing down your application.

•  Issues with your LLC name: Your chosen name may be too similar to another LLC in the state, or be missing a word such as “LLC.” Many states have rules about disallowed words, too; ask about restrictions in your state. Finally, make sure you’ve written the LLC name consistently throughout your forms.

•  No filing fee: Your articles of organization won’t be processed if you haven’t paid the state filing fee.

The Takeaway

Creating articles of organization for an LLC is an important step before you form your company. Research specific state regulations before filing to make sure you include all the necessary documents. Make membership and registered agent decisions in advance. As you file your articles of organization, consider creating an operating agreement for internal use at the same time.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What information is typically required in LLC articles of organization?

You usually need to include your company name, a business address, names of all the members/owners, and the name and address of a registered agent who will accept official correspondence on behalf of the LLC.

How do you file articles of organization for an LLC?

Articles of organization for an LLC are filed with the state in which you choose to operate. Check the state’s secretary of state website for information and forms that you can either file online or send through the mail.

Can I make changes to my LLC’s articles of organization after filing?

Yes, you can make changes to your LLC’s articles of organization as long as you follow any related protocol in your operating agreement. You can make changes by submitting articles of amendment to your state; check with the filing office to learn what forms are available. You’ll also want to amend your operating agreement to accord with the new information.

Are LLC articles of organization the same as an operating agreement?

No, LLC articles of organization are different from an operating agreement. (Confusion can arise because operating agreements are sometimes called articles of operation.) Articles of organization are filed with the state to provide contact and ownership details of the LLC. An operating agreement is an internal document outlining things like profit sharing, member duties, and decision-making processes.

How long does it take for LLC articles of organization to be approved?

Approval times for LLC articles of organization depend on your state and also on the time of year. In some states, you can pay a fee to expedite the LLC’s approval. Overall, though, filing online is usually faster than sending your forms by mail. Also, the process may be slower if your articles of organization contain errors or are missing information.

Photo credit: iStock/GaudiLab

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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