Congratulations! Starting your own business is a huge part of the American Dream. At the same time, most people never take the leap because it’s requires stepping outside of their comfort zone and can be a scary undertaking. So, setting out on the path to becoming your own boss truly deserves recognition!
There are many details to be considered and decisions to be made before you get even close to opening the doors to your business. Here are just a few items to think about in regards to the IRS and your taxation situation.
First, what type of entity will you create the business as? There are a number of options including; corporations, Limited Liability Companies (LLC), partnerships and sole proprietorships. There are pros and cons to each type of entity, from both legal and tax standpoints. We strongly suggest you discuss the best entity type for your situation with your CPA, as well as your attorney.
Next, you will need to identify all of the possible taxes you will be paying based on the type of business you will be engaged in. Some of the possibilities include: income tax (state and federal), self-employment tax, employment tax (if you pay employees), sales tax and excise taxes. There very well may be others and you will need to be sure you are aware of all taxes to which you are subject.
Don’t forget to obtain a federal Employment Identification Number. Most businesses will need this number to submit with their tax returns. This identifies you with the taxing authorities.
Consider what type of recordkeeping system you will be using to keep track of your income and expenses. This is an extremely important piece of the process. You will need to allocate time on a weekly or at least monthly basis to track your income and your expenses. The shoebox method is still used by some business owners, but it will cost you extra to have an accountant sort through everything and make sense of the mess.
If you hate paperwork or are just too busy to work on the accounting of the business, seriously consider using an accountant or bookkeeper on a monthly basis to handle the paperwork for you. It will cost less in the long run and you will have a monthly accounting of how the business is doing.
Talk with your accountant or CPA about whether you want to utilize the cash basis accounting method or the accrual basis method for tracking your income and expenses. Starting off, most people use the cash basis method just by default. This may not be the best option for you, and your accounting professional will be able to help you in this decision.
Let us know if you’d like some assistance with these items or any other questions you may have about your new venture. Call 916-576-7050. We’d love to talk with you!