Knowing the tax basics before you start a new small business will save you a lot of time and money, especially when the end of the year comes around.
Sole Proprietorship, Limited Liability Company, General Partnerships, S-Corporation and C-Corporation
There are several different structures your business can take and each is taxed differently. By default, you are a sole proprietorship and can report your business income and expenses on your IRS Form 1040, Schedule C. If you have a partner, you will be a general partnership by default.
If you choose to incorporate, you will be using a Limited Liability Company structure unless you plan on taking investments. If you plan on taking equity capital, you will likely use a Delaware C-Corporation structure.
The SP, LLC and GP all have similar tax implications, with all the profits passing through the corporate entity and being taxed like income tax. The S-Corp also passes its income through.
If the C-Corp is itself subject to tax, then any dividend or salaries earned by the CEO and shareholders are also taxed. In other words, a C-Corporation is a terrible tax entity if you are a small business because you will get taxed twice.
Tracking Write-Offs and Receipts
Keep all your expenses in folders, with receipts sorted by category of expense.
Whenever you entertain in a restaurant, if the meal is business-related, keep the receipt, with the name of the person/company entertained and the business purpose. Any business meal has a 50 percent write-off on taxes.
Other business expenses may include office space, telephone and internet usage, cell phones, stationery and more. Do a bit of research into what your write-offs might be and keep these in mind as you operate your business.
Do It Yourself, Bookkeeper or Accountant?
Whether you should you do your taxes yourself, hire a bookkeeper or an accountant really depends on the value of your time and the complexity of your tax issues.
If you’re just getting started, don’t have much cash flow and have relatively simple tax deductions, then you should probably just do your taxes yourself with software such as TurboTax.
On the other hand, if your business is a little more complex, then you should probably just hire someone to keep your financial books.
If you are at the point where hiring an accountant can actually save you money because they know what they are doing, then you should almost definitely hire an accountant rather than keep your own financial records.
Knowing what kind of corporate structure works best for you, what your business expenses are, and how to keep your books are some of the most important basics for starting a small business.
