Enterprising individuals seriously thinking of putting up a business must do their diligence in setting up the framework. Framework would include, but not limited to, market survey, business plan, product packaging (if a manufacturer or processor), and a few other necessities to start the ball.
We will not dive into that for that is a different realm. Our world is taxation and this article will be a tax guide for start up businesses as the title says, and we will stick closely to that. Hold on to your seat and enjoy the ride.
Is it a Business or a Hobby?
Huh? Specify, the Internal Revenue Service (IRS, from hereon) suggested. Businesses employ people to make profit while hobbies, like knife making, is engaged not to make profit. There are certain instances when hobbies become business like a karate school.
Selecting a Business Structure.
In simple terms, identify your business according to what is most fitting a structure it must have. Structures may be any of the following:
- Sole Proprietorship
- Partnership
- Corporation
- S Corporation
- Limited Liability Company
Single Proprietorships are simply one owner while Partnership is good for two or more persons as owners and may be limited partnership or limited liability partnership. Corporations come in C or S form, the difference of which is the extent of liability of each member.
Lastly, the LLC, or Limited Liability Company, has multiple owners and finely curtailed liability making this ideal between partnership and corporation.
Employer Identification Number (EIN).
This is necessary for this EIN will be used in the federal tax; however, check with the state you are located in to know if they require a state number or charter. This EIN should be easy enough because the IRS has provided the service online and free.
Business Taxes
This is the fun part where your business will contribute to the betterment of the country; be a patriot, not the New England ones.
- Income Tax
- Estimated Taxes
- Self-Employment Tax
- Employment Taxes
- Excise Tax
The form or structure of your business determines the type of tax you need to pay. All business structures must pay the annual income tax, except for Partnership where instead they will submit an information return.
For the other types of taxes mentioned above, click on the hidden link in the sub-heading “Business Taxes”. The list and sub-list are too heavy for this article to contain.
Record Keeping
Traditionally or digitally, a business owner must keep records to monitor the health of the company, that aids in the formulation of financial statements, track deductible expenses and company assets, and assemble the tax return long beforehand.
As to what sort of records to keep, the law does not require except in certain cases where federal tax is concerned. The structure of your business will determine if the law requires you to have business records. It is good business practice to keep records, anyway.
Records such as receipts, statement of accounts, sales, payroll and other transactions should be kept at least four (4) years since the IRS might take a while to process returns. Keeping these records also is your key to the hassle of burden of proof in permitting you to have that deduction from your federal tax.
When Do I Start My Tax Year?
Any business can adopt any of two tax years, unless required by Tax Code or Tax Regulation. The choice could either be Calendar Year or Fiscal Year.
Calendar Year is, needless to say, from January 1 to December 31; Fiscal Year, however, is still a twelve-month consecutive year except that it starts at the very first day of any month and must end at the last day of any month except December.
Why “except December”? If your Tax Year ends in December, that must start in January that makes it a Calendar Year and not a Fiscal Year. Dig? Cool, and I thought Algebra was complicated.
In End.
The information herein is partial. For complete particulars, we encourage you to communicate or visit the web page of TurboTax, a tax specialized company that can adequately attend to your questions on a private level. They even have free filings on your tax returns.
