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 my capital resources are, how my product or service will get to market, or how I will manage my day-to-day operations. These are very important issues for any startup and need to be addressed; however, there are other “must-haves” that are equally 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 business forms are taxed differently. The various forms of business structures include sole proprietorship, LLC, Partnership, S-Corporation, or C-Corporation. Each with its own set of rules, when it comes to how you pay taxes. The next consideration, whether you should get an Employer Identification Number (EIN) has been a popular topic among startups. Generally, regardless of your business form, you must apply for and obtain an EIN. This is because during the course of business, you will most likely make certain payments that require disclosures. The forms used to report these payments must include the identification number of the payee.
Another important consideration is deciding 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 year is 12 consecutive months ending on the last day of any month except December. A fiscal year of 52 to 53 weeks is a fiscal year that ranges from 52 to 53 weeks, but does not have to end on the last day of a 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 fiscal year due to many potential tax advantages that 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 when it comes to taxes. The IRS requires different business forms to file different tax returns (Schedule C, 1120, 1102s, 1065) at different times during the filing period. Also, depending on whether you have W-2 employees or the reporting requirements of different types of independent contractors will apply. You may also face state and local sales tax reporting and payment requirements. It is also important because it has been argued to be one of the most problematic areas for small business start-ups.
Finally, understand the proper accounting method (cash vs. accrual), what business expenses are deductible, and what records to keep, and for how long the last three “required skills” are. Depending on the accounting method you choose, you could be paying more taxes than you should. Making this determination requires a good understanding of the accounting methods available and how those methods affect your specific situation. Understanding which expenses are deductible will help you keep a proper record, as well as help your tax professional maximize your credits and deductions. Remember, a tax professional is generally limited to the information that you provide. Tax professionals may understand the implications of certain deductions, but without your input they do not know that such deductions apply.