What do you need to know about taxes before you start a business? Knowing your tax basics before you start not only reduces your likelihood of an audit, it will also save you a lot of money in taxes and accounting fees – as well as save you a lot of time when the end of the year comes around.
=> Sole Proprietorship, LLC, General Partnerships, S-Corp and C-Corp
There are many different corporate forms your business can take. Each is taxed a little differently. By default, you’re a sole proprietorship. If you have a partner, you’ll by default be a general partnership.
If you choose to incorporate, in general you’ll be using an LLC form for small businesses unless you plan on taking investment. If you plan on taking equity capital, you’ll likely use a Delaware C-Corp.
The SP, LLC and GP all have similar tax implications, with all the profits passing through the corporate entity and being taxed like income tax. The S-Corp also passes its income through.
If the C-Corp is itself subject to tax, then any dividend or salaries earned by the CEO / shareholders are also taxed. In other words, a C-Corp is a terrible tax entity if you’re a small business because you’ll get taxed twice.
=> Tracking Write-Offs and Receipts
Keep all your expenses in a drawer, with receipts sorted by date. On the back of each receipt, write a note about what that particular expense was. That way, when it comes time to do your taxes you’ll know exactly what all your expenses were.
Whenever you eat a meal, if the meal is at all business related, keep the receipt and write off the meal. Any business meal has a 50% write-off. Make sure you write down on the receipt who you had the meal with, just in case of an audit.
Other write-offs may include office space, cell phones, internet usage, stationery and more. Do a bit of research into what your write-offs might be and keep these in mind as you operate your business.
=> Do It Yourself, Bookkeeper or Accountant?
Should you do your taxes yourself? Should you hire a bookkeeper? Or should you hire an accountant?
It really depends on the value of your time and the complexity of your tax issues.
If you’re just getting started, don’t have much cash flow and have relatively simple tax issues, then you should probably just do your taxes yourself with something like TurboTax.
On the other hand, if your business is a little more complex, you’re running more volume and your time is a bit more valuable, then you should probably just hire someone to keep your books.
If you’re at the point where hiring an accountant can actually save you money because they know what they’re doing, then you should almost definitely hire an accountant rather than do your own books.
Knowing what kind of corporate structure works best for you, what your write-offs are and how to keep your books are some of the most important basics for starting a small business.