Starting your own business can be one of the most rewarding, exciting and profitable opportunities you'll ever experience. After all, who doesn’t want to be their own boss, call the shots and possibly establish a financial legacy? 

For many, entrepreneurship is the ultimate career goal. But coming up with a great business idea is only the first step. Actually starting your own company can be a complicated and overwhelming endeavor. In fact, 90% of all start-ups fail, often in the first year, due to poor planning and execution.

We’re not going to get into the specifics of how to make your business successful in this article, but we will go over some of the things you’ll need to get the ball rolling!

CHOOSE A BUSINESS STRUCTURE.

When starting a new business, you must first decide what form of business entity to establish. Your form of business determines how your taxes will be figured and which income tax return form you have to file. This is a very important step! The most common forms of business are Sole Proprietorships, Partnerships, Corporations, S Corporations and Limited Liability Companies (LLC). 

Let’s have a look at these in more detail:

• Sole Proprietorship: A sole proprietor is someone who owns an unincorporated business by themselves.

• Partnership: A partnership is a relationship between two or more individuals to do trade or business. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business.

• Corporation: In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take certain special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

• S Corporation: S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.

• Limited Liability Company: A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations - you should check with your state if you are interested in starting an LLC. Owners of an LLC are called “members”. Most states do not restrict ownership so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members, and most states also permit “single-member” LLCs, those having only one owner. These single-member LLCs are disregarded for federal tax purposes and their owners, rather than the LLC, pay tax on whatever profits they may realize.

CHOOSE A TAX YEAR.

You must figure your taxable income on the basis of a tax year. A “tax year” is an annual accounting period for keeping records and reporting income and expenses. Generally, any entity in which the ultimate taxpayer is an individual (such as sole proprietorships, partnerships, LLCs and S corporations) must file on a calendar-year basis.  Other entities, notably C corporations, can file on a fiscal-year basis, if they so choose.  Here are definitions of calendar and fiscal year:

• Calendar year - 12 consecutive months beginning January 1 and ending December 31.

• Fiscal year - 12 consecutive months ending on the last day of any month except December.

APPLY FOR AN EMPLOYER IDENTIFICATION NUMBER (EIN).

An Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is used to identify a business entity. Generally, businesses need an EIN for tax purposes, opening a business bank account, etc. You can apply for an EIN in various ways but the easiest is to apply online using a free service offered by the Internal Revenue Service (IRS). You should also check with each state in which you plan to do business or from which you may be deriving income to see if you need a state number or charter.

VERIFY STATE INCOME TAX REQUIREMENTS.

Most states tax income having its source within their borders, and their definition of “having its source within their borders” can be quite broad. For example, many states now tax service income as being located where the consumer of the service is located, not the provider. So, you might have a service business in Texas which has no location, assets or employees anywhere but Texas, but has some clients in California. In a case like this, California may require you to file a tax return and pay tax on all the income you derive from your California clients. If you are in a retail-type business (even an internet business), many states now also have income tax thresholds regarding sales occurring in their state. Exceed a certain number of transactions or a certain dollar value of transactions in their state and you become subject to their taxation, even if you never set foot in that state.

State income taxation is becoming an increasingly complex area. If you will have a business which has customers or does business in more than one state, it's a good idea to get professional advice about how best to comply with state income tax laws.

HAVE ALL EMPLOYEES COMPLETE THESE FORMS.

Federal law requires that every employer who hires an individual for employment in the U.S. must complete Form I-9, Employment Eligibility Verification. Form I-9 will help you verify your employee's identity and employment authorization. In addition, you’ll need to have any employees complete Form W-4 so the correct federal income tax can be withheld from their pay. Employees should consider completing a new Form W-4 each year and when their personal or financial situation changes. Here are a couple links with more info:

• Form I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services

• Form W-4 Employee's Withholding Allowance Certificate

PAY BUSINESS TAXES.

As a new business owner, it’s important to understand your federal, state and local tax requirements. This will help you file your taxes accurately and make payments on time. The form of business you operate determines what taxes you must pay and how you pay them. The following are some of what you'll need to look out for:

• Income Tax

• Self-Employment Tax

• Employment Taxes

• Sales Taxes

As you can see, new business owners can have a variety of tax responsibilities and you don’t want to ignore them as you begin your exciting new venture! Granted, it can all seem a bit daunting at first, but it is something which you can deal with – lots of others have done so successfully. Don't let this rat's maze of taxation keep you away from your goal.  

If you have questions about starting your own business or would like assistance getting things setup, please CONTACT US today. Our certified tax professionals and business experts are here to help!