You have a great idea for a new business, you know and understand the field you want to open a new business in, you have identified the niche you want to target, you have a marketing plan to exploit that niche, you have the startup capital to begin your business (or at least a plan to get the capital), you have identified the equipment and tools needed to start this business, and are looking at locations (if necessary) for this business.
That is only part of the planning needed for starting a new business.
Another major consideration is taxes, records, and tax planning. The IRS says, “It is important for you to know your federal tax responsibilities” and if you don’t know what your tax responsibilities are and don’t fulfill them then the IRS can levy financially crippling penalties against you and your business so developing a tax plan is as important as developing a business plan.
- You need to know how are you going to legally organize your business, because this will have enormous tax implications for both you and your estate. The most common types of businesses are sole proprietorships, partnerships, corporations, S corporations and Limited Liability Companies. Each type of business reports its business activity on a different federal tax form.
- You need to understand the different types of taxes that your business will have to pay. The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax; but businesses with employees also are responsible for deducting Social Security taxes, unemployment taxes, state income taxes, and sometime state and local income taxes from their employees’ wages. The business is responsible for submitting these withholding along with the appropriate documentation to the IRS or other taxing authority in a timely manner. Businesses that do retail sales also need to collect sales taxes as well as special taxes like beer, cigarette, lodging, or hunting/fishing gear taxes when those are applicable. Most businesses also have to purchase business licenses from their municipality every year and pay property taxes if they own commercial property.
- Most businesses will need to get an Employer Identification Number (EIN) for tax purposes. You can get your EIN number online at IRS.gov.
- Keep good records. Most business people are good at doing what they do and many focus their efforts on being the business rather than on the business of running the business. If this leads to poor record keeping it will hurt you down the road. Good record keeping will help you when it’s time to file your business tax forms at the end of the year. A good record keeping system tracks deductible expenses and support all the items you report on your tax return. Good records are also necessary to help you monitor your business’ progress and prepare your financial statements.
- Select an accounting method. Every taxpayer must also use a consistent accounting method. An accounting method is a set of rules that determine when to report income and expenses. The most common two systems are the cash method and the accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true whether you receive the income or pay the expenses in a future year.
For more information and help on setting your business up properly, click here.