In this blog, I will break down the factors to consider when you are in the process of starting a new business or revisiting the idea of a previous one.
When it comes to setting up a new business, most business owners fail to analyze the tax responsibilities that will eventually surface after their business has been in operation. It is advisable to consider the tax effect of starting a new business earlier rather than later in the business development process.
Here are the things to consider and their potential impact on you and your business:
1. Choose a suitable business structure
One question that comes to most people’s minds when they decide to start a business is “what should I name my business”? Similarly, the question that comes to the IRS’s mind when you file for your business registration is, “what business structure is this”? Thus, choosing a business structure is the very first step. Your business structure will allow you to evaluate the tax-related advantages and disadvantages aligned with your business. The following are common business structures that you can select for your business:
Sole Proprietorship – an unincorporated business that has only one owner (YOU!)
Partnership – an unincorporated business with two or more owners. These members will share the profits and losses of the business based on the business agreement.
Corporation – a separate legal entity. The business has owners who are referred to as shareholders.
S Corporation – a separate legal entity. It is a corporation that makes an election to report all its profits, losses, and deductions at the shareholder level.
Limited Liability Company (LLC) – a business structure that is allowed by the state. An LLC that has only one owner is known as a Disregarded Entity.
2. Determine your tax year
Since many businesses use the standard December 31st year-end, it is often the default. However, picking a year-end that is not December 31st could be suitable for your respective business process.
Here are the questions to consider when selecting either a December 31st or a Fiscal year-end:
- Will this tax year better capture the operations of your business?
- Will this tax year make your business financial planning easier?
- Will this tax year complement the nature of your business?
Understanding the answers to these questions gives greater insight into the more suitable year-end. For example, if you are a corporation with fluctuating quarterly sales and a lot of inventory, you might consider selecting a fiscal year and not a calendar year. Doing this will ensure that your business income and losses are matched to the periods of high and low sales.
The two options that businesses have when it comes to tax year are:
Calendar Year – reports the business operations from January 1st through December 31st. (No selection necessary)
Fiscal Year – reports the business operations over a 12-month consecutive period and does NOT end on December 31st. (Subject to approval from the IRS for some business structures)
3. Apply For EIN
A Federal Tax Identification Number (EIN) is like your business social security number. You must apply for an EIN for your business through the IRS website. In addition to the legal aspects, having an EIN allows you to do the following on behalf of your business: apply for a business line of credit, open a bank account, purchase real estate, pay taxes plus so much more.
4. determine How Many Employees Your Will Have
Will your business have employees now or later down the line? If so, you will need to ensure that they fill out Form I-9 and Form W-9. All businesses with employees are required to pay quarterly payroll taxes. To withhold the appropriate amounts from each employee, you must have your employees authorize these withholding payments by filling out the above forms. Failure to pay quarterly taxes can result in penalties and interest for your business.
5. Pay Your Quarterly Business Taxes On Time
Many businesses fail to make their quarterly tax payments and as a result, end up having to pay penalties when they file their tax returns. Every business is required to make quarterly tax payments. The understanding behind making quarterly tax payments is to prevent taxpayers from having to pay an entire year’s worth of taxes all at once. Tax planning is one way to ensure that your business is compliant with quarterly tax obligations while maximizing tax benefits.
Quarterly Tax Due Dates:
- First Quarter: April 15th
- Second Quarter: June 15th
- Third Quarter: September 15th
- Fourth Quarter: January 15th
6. Stay Informed
Now that you have considered all the important aspects of starting your new business, you are ready to begin a successful operation. Great Work! As a business owner, your job is never finalized, especially when it comes to the tax code. Remember to stay up to date with the various Federal and State requirements associated with your business.
In Conclusion
I hope you found these steps to be useful as you venture onto this new path of entrepreneurship. Remember to SUBSCRIBE to this blog post to receive updates about important tax-related topics that could be beneficial to both you and your business.
Free checklist for starting a new business.
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