Starting a business can be expensive and complex depending on the type of business you start. A strategic business plan helps you address questions like what are my capital resources, how will my product or service get to market, or how will I manage my day-to-day operations. These are very important topics for any start-up and need to be addressed, however, there are other “must know’s” that are just as critical to the success of a new business.
The first, which is the right business form to choose, could have a significant impact on your bottom line. This is because different forms of business are taxed differently. The various forms of business structures include sole proprietorship, LLC, partnership, S-Corporation, or C-Corporation. Each with their own set of rules, when it comes to how you pay taxes. The next consideration, should I obtain an Employer Identification Number (EIN) has been a popular topic among new businesses. In general, regardless of the form of your business, it is mandatory to apply for and obtain an EIN. This is because, during the course of your business activities, you will most likely make certain payments that require disclosures. The forms used to report these payments must include the beneficiary identification number.
Another important consideration is deciding on your tax year. A fiscal year generally consists of twelve months. The IRS allows two types of tax years. The first is the Calendar Year, which begins on January 1 and ends on December 31 of each year. The second is the fiscal year. “A fiscal fiscal year consists of 12 consecutive months ending on the last day of any month except December. A 52-53 week fiscal year is a fiscal year that ranges from 52 to 53 weeks but does not have to end on the last day of one month” (IRS publication 538). Although most startups choose the calendar year, it is good to understand the difference between the two. Once your business grows, it may be wise to switch to the tax year because of the many potential tax advantages you can take advantage of as a result.
The next three considerations include business owners knowing what type of federal and state tax they will be responsible for paying, what tax forms to file, and how to properly account for employees, tax-wise. The IRS requires different business forms to file different tax returns (Schedule C, 1120s, 1102s, 1065s) at different times during the filing period. Also, depending on whether you have W-2 employees or independent contractors, different types of return of information requirements will apply. You may also face state and local sales tax reporting and payment requirements. It is also important because it has been argued that it is one of the most problematic areas for small business start-ups.
Finally, understand the proper method of accounting (cash versus accrual), what business expenses are deductible, and what records to keep and for how long the last three “must know” are. Depending on the accounting method you choose, you could be paying more tax than you should. Making this determination requires a good understanding of the accounting methods available and how those methods affect your specific situation. Understanding what expenses are deductible will help you keep proper records, as well as help your tax professional maximize your credits and deductions. Remember, a tax professional is generally limited to the information you provide. Tax professionals may understand the implications of certain deductions, but not know without your input that those deductions apply.