Starting your own business can be exciting and rewarding. It is critically important, however, to understand all of your tax and recordkeeping obligations. Use this guide to help you make sure you are ready for tax season.
One of the first things you will need to do is decide what type of business you will establish. Each carries its own legal and tax requirements. For detailed information on the types of business taxes to which you may be subject, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Business-Taxes.
A Sole Proprietorship is the simplest business structure. It consists of one individual who owns and runs the business. There is no financial distinction between the business and the business owner. If you run your business as a sole proprietor, you report the business income as your own, using IRS Schedule C. You are personally responsible for paying all income, self-employment, and estimated taxes, as well as all of the business’s other debts. See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Sole-Proprietorships for more information.
You can form one of three types of partnerships: general, limited, or joint venture. Partnerships must register with the state under a businesses name. Like sole proprietors, partners are responsible for income, self-employment, and estimated taxes and all other debts incurred by the business. For information on filing taxes for a partnership, see http://www.irs.gov/Businesses/Partnerships.
A limited liability company (LLC) can be owned by one individual or by partners. Owners report profits on their personal income taxes. Unlike the owners of a partnership or sole proprietorship, LLC owners’ personal assets are largely exempt from collection to pay the company’s debts. For detailed information on forming an LLC, see http://www.sba.gov/content/limited-liability-company-llc.
To file as an S Corporation, commonly called an S Corp, you must first register as a corporation and have no more than 100 shareholders. After the business is registered as a corporation, all shareholders must submit IRS form 2553 to become an S Corp. S Corp shareholders have limited financial liability for the debts of the corporation, and shareholders who are employees of the S Corp report their income as employment income, which must be consistent with the fair market value of the work they perform. For more information about forming an S Corporation, see http://www.sba.gov/content/s-corporation. For detailed tax information, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations.
Due to the legal and tax complexity of corporations, the structure tends to be used primarily by large, established organizations. Corporations are owned by shareholders and are subject to corporation taxes. Aside from their stock investment, shareholders’ personal assets are protected and not accessible to pay the debts of the corporation. For more information on the corporate business structure, see http://www.sba.gov/content/corporation. For tax information for corporations, see http://www.irs.gov/Businesses/Corporations.
Employee Identification Number (EIN)
Depending on the structure of your business, you may need to apply for an employee identification number (EIN). To find out if you need an EIN or to apply for one online, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-EINs.
Keeping meticulous records is essential to monitoring the progress of your business, efficiently preparing financial documents, and filing taxes. You are free to choose how you keep your records, but you should be able to easily track income and expenses, identify deductible expenses, and identify the sources of your receipts. In addition to whatever recordkeeping method you choose, you should also save supporting documents such as receipts, invoices, cancelled checks, and bank statements. This will ensure that you can file an accurate tax return and provide evidence to back up your entries.
You must also choose an accounting method for tax purposes. The two primary choices are the cash method and the accrual method. The cash method is to report income and expenses in the year they are received and paid. The accrual method, on the other hand, involves reporting income in the year it is earned and expenses the year they are incurred. The IRS provides detailed information and advice on recordkeeping and accounting for a new business: http://www.irs.gov/pub/irs-pdf/p583.pdf.
When starting your business, the aid of a financial professional can be invaluable. Contact Boelman Shaw Capital Partners to discuss your business plans and find out how we can help.