Getting it Right: Why You Need to Think About Taxes from Day One of Your Business

One of the most important tasks for new business owners is learning about taxes. Businesses are taxed much like individuals. Further, the structure of the business often dictates the amount of taxes that will be paid. One way to learn about taxes and business is by hiring an accountant. A good accountant helps owners get it right from day one.

business tax

Getting Started

Most businesses need a federal tax identification number or employer identification number. This number identifies a company as a social security number identifies a person. It’s preferable to obtain a tax i.d. number rather than using your social security number for business documents. Visit the accountants at bswllc.com to learn more. A business owner definitely needs to consult with an accountant about whether to operate as a sole proprietor or to form a corporate structure.

Sole Proprietor

Sole proprietors put themselves at risk because they are personally liable for business debt, losses, and other liabilities. Incorporating creates an identity for the business apart from the owner. In addition, sole proprietors file business and individual tax returns together. On the other hand, there are some advantages. Sole proprietors pay the lowest tax rate of any business structure. Further, it takes less time to get the business running.

Partnerships

A partnership occurs when two or more people share ownership of a business. The partners are equally responsible for profits and losses. Partners must file a tax return for themselves and the business, which can be tedious. Another disadvantage is that partners are responsible for the debts of other partners.

A limited liability corporation (LLC) is a hybrid between a partnership and a corporation. Owners are called members. An LLC can have one or more members who file taxes on their personal returns. One of the main advantages of an LLC is having the flexibility of a partnership and the protection of a corporation.

Corporations

C Corporations have their own identity and are owned by shareholders. Owners are protected against legal and financial liability. Corporations must file income tax returns. Shareholders may have to pay taxes on money twice. They pay when the corporation makes a profit and when the profit is disbursed. Profits and losses are reported on the personal tax returns of S corporation owners. Specific criteria must be met to form an S corporation.

Different Types of tax

Businesses pay a variety of taxes including employment taxes. Owners pay FICA (Social Security and Medicare) for employees as well as federal unemployment taxes. The owner pays all unemployment taxes and half of FICA. In addition, some owners pay tax on the gross receipts of a business. Sole proprietors may be exempt from gross receipt tax. However, corporations and LLCs are most likely to pay a gross receipt tax.

Sole proprietors pay self-employment tax which is their contribution to social security and medicare. Owners pay self-employment tax if net earnings are greater than $400.00. Additionally, partners may have to pay this tax. Many business entities pay estimated taxes throughout the year. These taxes are paid periodically by those who expect to owe on a federal return. Sole proprietorships, partnerships, corporations, and S-corps pay estimated taxes.

Business structure has a lot to do with what taxes are paid and when. That’s why it’s important to have an accountant in your corner. Accountants recommend organizing a business so the least amount of taxes will be owed.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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