An integral part of your success in a startup business is making sure you’re in a good place from the tax perspective. You need to be able to get through those first couple of years without a heavy tax burden, and reaping the benefits of having a business loss. Once your company is turning a solid profit, things will change, of course.
Here are some important factors to keep in mind as you plan the tax strategy for your new business:
When you’re first starting a business, you need to choose what legal entity your business will use. You’re looking at a choice between a sole proprietorship, a partnership, an LLC, or a corporation. Each of these has its own tax implications.
A sole proprietorship, for example, treats your business income as your personal income. A partnership does the same, but it divides the business income among the business partners. An LLC or an S corporation uses “pass-through” taxes, where the owners treat the business income as personal income, too. A C corporation poses the risk of double taxation.
This has a lot to do with your business structure. You also need to be aware of state, local, and city taxes, however. Larger cities have business privilege taxes, as well as the potential for a city income tax.
Being in tax compliance means having a Tax ID Number (also known as an Employer Identification Number). You can file for one of these from the federal government. If you’re a sole proprietor, you will probably just use your social security number.
Realize, as well, that there may be licensing or registration taxes involved in your business, depending on your industry and location.
Even if you have a sole proprietorship, it is tremendously advantageous to keep your personal finances separate from your business finances. You should have a separate bank account for your business. You should keep a ledger for your business that’s separate from your personal checkbook.
If you’re incorporated, you’re going to need to keep these separate in order to maintain protection from liability.
There are all sorts of expenses that fall into the “ordinary and necessary” category that you’ll incur as you build your business. This includes things such as training, travel, educational materials, entertaining your clients, and even a home office deduction.
The key is to work with your tax expert to make sure you’re getting credit for all of your deductions, and that you have the necessary paperwork to back up those deductions as well.
It’s important that you stay on top of your books from the beginning. Letting your record keeping slide will cost you money in lost tax deductions. In addition, it will make it harder to know how well your business really is doing and can cause cash flow problems.
Accounting software like Peachtree or QuickBooks can make bookkeeping a relatively easy process. They can help you track categories for expenses, for example, and can in some cases give you additional tools to help with your business finances.
Your tax expert will have a much easier time of things if you keep your books up to date and use a reliable software package, as well.
If you believe you’re going to make a profit in your first year, you should sign up and pay quarterly taxes from the beginning. If you delay filing your taxes until the end of the tax year, you may find yourself in a situation where you have to send a large check to the government at a time that’s not always convenient. Paying quarterly taxes lets you pay your tax bill in more manageable increments.
That said, there are times when it doesn’t make any sense to pay quarterly, too. If your business is operating at a loss (as many businesses do for the first couple of years of business) it would be silly to start setting aside money, just so you can get it back in April. Instead, invest that money in your business today.
With the right strategies, you can make the most of your startup from a tax perspective. Spend some time discussing your business with your tax expert, and she can help you know what your next steps need to be.