Starting a business can be one of the most exciting and terrifying experiences in your life. You can make the experience less painful—and more profitable— if you obtain professional help before you start your business.
Choosing a Business Entity:
First, and most importantly, you have to decide how your business will be structured. Will it be a corporation, a partnership or another type of business entity? How much of your money and personal assets are you willing to risk in the business? If the business isn’t profitable, creditors, including the IRS, can come after you. This is the reason why the choice of business entity is so important. Depending on how you structure your business, you can shield some or all of your personal assets. You also have to think about the tax consequences of your choice of business entity. Differently structured businesses are taxed in different fashions. If you incorporate your business, the corporation pays taxes (unless you elect special “S corp” tax treatment). But if you operate your business as a partnership, you and your other partners pay the taxes for the business.
Factors Affecting Entity Choice:
There is no blanket rule that determines what entity is right for your business. However, identifying the existence or absence of certain key factors can go a long way in helping you make the right decision.
• Factor #1:
Contribution of property and services to the entity
• Factor #2:
Limitations on investors’ and owners’ rights to participate in management
• Factor #3:
Restrictions on investors
• Factor #4:
Types of stock interests
• Factor #5:
Debt and equity
Yet another consideration for your newly-formed business is how you are going to bring the enterprise into compliance with the applicable tax laws. It is important to understand early in the planning stages of your business what taxes you be will required to pay, withhold, and report. Income tax. Similar to the income tax on wages, the federal income tax on business income is a pay-as-you-go tax. Before you even consider which income tax form you have to file, you must withhold and pay the income tax due on your revenue as you are currently earning it. As a result, most businesses must make income tax payments to the IRS throughout the year, based on their estimated income tax liability.
• Employment tax.
When paying employees of your new business, you must withhold employment tax on their wages. The term “employment tax” is somewhat of a misnomer, as it actually includes Social Security and Medicare taxes, and federal income tax withholding. You, as the employer, must withhold applicable taxes from an employee’s wages, as well as pay a matching amount. You will also be required to pay federal unemployment (FUTA). Additional state and local withholding and unemployment taxes will apply as well.
• Self-employment tax.
Although you may be your own boss, this does not shield you from the withholding requirement for employment tax. The law generally requires sole proprietorships and partners to withhold a percentage of their related income for the OASDI (Old-Age, Survivors, and Disability Insurance).
• Excise tax.
Finally, depending upon the nature of your business, you may be subject to the federal excise tax. This tax is basically a selective sales tax affecting manufacturers of certain products, companies using certain kinds of equipment and those receiving payment for certain services. A few examples include: Environmental taxes; Communications and air transportation taxes; Fuel taxes; and Retail sales tax on heavy trucks, trailers and tractors.
• State tax.
Each state generally has sales and use tax, income tax and property taxes that must be paid. It is important to understand your business’ obligations regarding these taxes and what your withholding and reporting requirements are.
Every factor that should be considered when selecting the proper entity for your venture is beyond the scope of this article. However, you are now acquainted with some of the major considerations. This familiarity will help make the first meetings with your tax advisor more productive and your business more profitable. If you need assistance in starting up your business, or would like more information on the above, please contact Aliign at (317) 428-6872, or firstname.lastname@example.org