Every year hundreds of thousands of new businesses enter the marketplace. New businesses face many challenges to achieve success. One such challenge is taxes. The way in which a business addresses tax issues can make a critical difference in its ultimate success or failure. Each year the IRS discusses important tax-related issues for new companies. Here are four of the most important tax-related issues, as cited by the IRS:
- Entity selection: Deciding to file as an S-Corp, a C-Corp, a partnership, Limited Liability Company (LLC) or sole proprietorship can have significant tax implications. In an S-Corp, profits, losses, deductions and credits flow from the corporation directly to its shareholders. As a result, shareholders are not taxed on their corporate and personal income. S-Corps must meet a number of requirements to be eligible for this designation. In a C-Corp, the business is recognized separately from shareholders. Partnerships are taxed similarly to S-Corps, in that any income derived from the partnership passes through to the company's partners. Limited Liability Companies can be treated as corporations or partnerships depending on various factors.
- Potential business taxes: All businesses are responsible for paying income taxes. Corporations, LLCs and sole proprietorships are responsible for filing an annual tax return. Partnerships file what is known as an information return. Businesses with employees must pay employment taxes. Employment taxes cover an employee's Social Security, Medicaid, unemployment taxes and federal tax withholding. Sole proprietorships are responsible for paying self-employment taxes. This tax includes Social Security and Medicare taxes. Certain types of companies may also be responsible for paying federal excise taxes.
- Accounting methods: New businesses must decide on the best way to report its expenses and income. Companies can select the cash method or the accrual method. Businesses report income and deduct expenses in the year they are received or paid under the cash method. With the accrual method, businesses must report income the year it is earned and must deduct expenses the year it is incurred.
- Employer identification numbers (EINs): Businesses must apply online to receive an EIN for tax purposes.
Obviously, tax considerations are or paramount importance when starting a business. A tax lawyer can provide essential guidance to getting a company off on the right foot. The tax attorneys at Goldburd McCone LLP have successfully counseled businesses in an array of industries over the past three decades.