So you’re ready to bring your creative and innovative idea and small business to life. Starting out with a clear understanding of the accounting and tax issues involved in your business will make growing and changing down the road smoother. Here are some important things to know before beginning a business.
Choosing a Business Structure
There are five types of entities you can file your business as. The most common structures include:
- Sole proprietorships – Owning an unincorporated business by yourself.
- Partnerships – Two or more people owning a trade or business.
- Corporations – Shareholders exchange money and/or property for a corporation’s capital stock.
- S Corporations – Corporate income, losses, deduction and credits are pushed to the shareholders for tax purposes.
- Limited Liability Company (LLCs) – Depending on certain elections and number of members, an LLC is treated as a corporation, partnership or as a sole proprietorship (Schedule C on owner’s tax return).
Understanding the Tax Side of Businesses
There are four basic types of business taxes and it’s important to be aware when they are paid and how you can pay them.
- Income Tax – Partnerships file an information tax return, but all other businesses must file an annual tax return.
- Self-employment Tax – Social security and Medicare tax for those who work for themselves.
- Employment Tax – There are certain employment tax responsibilities for employees of a business that must be paid, and certain forms must be filed.
- Excise Tax – Depending on the specific tax, excise tax can be imposed on the manufacturer, retailer or consumer for goods and services.
Other Important Notes
- Obtaining an Employer Identification Number (EIN) – An EIN is used to identify a business entity. You can obtain an EIN through the IRS website quickly and for free.
- Always keep adequate records. Keeping documents organized will assist with preparing financial statements and record keeping of income and deductible expenses.
- Taxable income for small businesses is based on a tax year, calendar year or fiscal year. This is the annual accounting period for reporting income and expense items.
Have you been considering starting a business? Contact a Henry + Horne professional today. Our team is more than happy to help answer your questions.