Beginning a small business requires you to understand several things that can impact you as an individual and as a business owner. We are highlighting three major parts that impact your taxes and core business structure in this article.
Selecting A Business Structure
One of the top and most important tasks to complete when opening a small business is to identify the structure of your business. By identifying this, the legal structure will determine how much you pay in taxes, your personal liability, and the registration requirements your business will follow. Here are a few of the most common business structures to choose from:
Limited Liability Company (LLC) - The most versatile business structure which allows the IRS to treat the LLC as either a corporation, partnership, or as a part of the owner’s tax return depending on how many members and elections are made.
Sole-Proprietorships - This structure is for individuals who own an unincorporated business by themselves.
Partnerships - When two or more people do trade or business, this structure is chosen.
Corporations - This type of business involves prospective shareholders exchanging money, property, or both for the corporation’s capital stock.
S Corporations - This type of corporation elects to pass corporate income, losses, deductions, and credits through their shareholders for federal tax purposes.
Understanding Business Taxes
When you decide on the business structure that will be followed for your small business, the next thing to understand is what taxes you are responsible for. There are four general types that may need to be paid based on how your business operates:
Income Tax - All businesses must file an annual income tax report besides partnerships. This tax is calculated on all income received in a specified year.
Self-Employment Tax - Individuals that work for themselves pay this form of tax, which is a social security and Medicare tax, to cover them under the social security system.
Employment Tax - Specific forms and certain employment tax responsibilities must be filed if a small business has employees.
Excise Tax - This tax is imposed on some services, activities, and various goods which at times may be imposed on the manufacturer, retailer, or consumer.
Get State and Federal Tax IDs
One of our final main and most important parts when creating a small business is to apply for your state and federal tax identification numbers.
A state tax ID number is needed depending on the state your business is registered in and what they require. The requirements can be found in your state’s laws and regulations regarding income and employment taxes.
The federal tax ID is also known as the Employer Identification Number (EIN). It works like a personal social security number, but is strictly for your business. Having this allows you to pay the incurred taxes you owe to the federal government. It is necessary to have if your business pays employees, operates as a corporation of partnership, and more that is outlined here.
Overall, when considering opening a business, it is important to remember to do your research, understand what type of business you will be conducting, and know the requirements needing to be met in order to function properly under the state and federal laws in place for business incorporation.
