Starting a New Business: What Are My Tax Obligations?

If you are starting a new business it’s important you start out on the right foot with the IRS.

You’ll want to make sure you correctly identify how you will classify your business for tax purposes. Not correctly choosing the right one can leave you vulnerable to tax penalties and liable for damages caused by your business.

So it’s important to know what’s at stake and what best fits the needs of your new venture.

Here are a list of ways you can classify your business:

• LLC or Limited Liability Corporation – An LLC protects you from personal responsibility of business debts and claims. So, if you owe money through debt or lawsuit, only the assets owned by the business can be sought to satisfy those claims. However, you still report the profit and losses of the business on your personal tax filings.Visit IRS page on LLCs for more details>>
• Sole Proprietorship – Basically, this is when you and only you are the company. For example, you’re a consultant, carpenter or photographer. You claim profits and losses on your personal income tax and are taxed on your profits. The drawback here versus an LLC is that you CAN be held personally liable for costs incurred by the business. A pro to this classification though is that it is easy to setup and usually requires very little paperwork, especially if you’re doing business as (DBA) your own name–for example, “John Smith Photography.” Visit IRS page on Sole Proprietorships for more details>>
• Partnership – This one is a bit more obvious. It’s when two or more people go into business together pooling together money, labor and/or skills with an expectation of sharing the profits. Under this structure, a partner does not report the entire profit and loss of the business but reports only their own share of the profits. Visit IRS page on Partnerships for more details>>
• Corporation (C Corporation) – Corporations are their own entity and report a profit and losses the way a sole proprietor would. A corporation differs from a Partnership because shareholders, while investing assets like a partnership, are receiving capital stock in exchange for said investments. A corporation is taxed on its profits and then the shareholder is taxed on the profit they receive from the corporation. Visit IRS page on Corporations for more details>>
• S Corporation – An S Corporation is much like a C Corporation but passes all profits, losses and deductions on to its shareholders. This prevents the entity from being taxed twice like a C Corporation is taxed. However, there are multiple requirements the organization must meet to be eligible. For example, you have to be a domestic corporation with no foreign shareholders and you must have less than 100 shareholders. Visit IRS page on S Corporations for more details>>

It’s important to keep in mind this is just for Federal filing status. States have different requirements and regulations you’ll want to make sure you look into. If you’re unsure of what your state requires or what filing status is best for you, give a call or email and we can help.