Ever thought about being your own boss? Want your work to attest to your own skill, rather than have middle managers to deal with? Or maybe bring people together and work for a common dream? Consider starting your own business. Establishing a business in the United States is not relatively complicated. To start off, figure out what kind of business you want to participate in. Next, you need to decide on what kind of type of business structure you want (sole proprietor, partnership, corporation, etc.), and then develop a reliable and robust recordkeeping system.
Which business structure should I go with?
These are some of the most common business types that are established:
- Sole proprietorship – Very simple type of business. Unincorporated and owned by a single individual. All profit, liabilities, and taxes are connected to the individual owner, and therefore are simply reported on an person’s 1040 form.
- Partnership – Owned and operated by 2 or more people who are in a business relationship. Partners contribute capital and are involved in the operations of the company. Partnerships are known as “pass through entities”, which means the
partnership’s taxes are passed along to the partners of the firm and onto their individual tax forms. However, they still must file informal returns of the company’s operations. - Corporation – Shareholders exchange capital and other assets in exchange for stock ownership of a corporation. More complicated type of business with many rules and regulations surrounding it. Corporations are regarded as separate legal entities and are taxed like individuals. This means a corporation’s shareholders are double taxed (individually, and for their partial ownership of a corporation).
The nature of your business will likely determine what type of business you want to become. It probably wouldn’t make sense for a mom & pop donuts shop to be established as a corporation, but instead as a partnership, due to the simpler nature of establishing one. On that same note, an engineering firm would probably find a corporation more beneficial because of liability concerns and the ability to raise capital from shareholders.
Employer Identification Number, Tax year, and Accounting Methods
After deciding what type of business you want to be, obtain a Federal Employer Identification Number, similar to an individual’s social security number. Unsure if you need an IRS EIN, check out our previous article on this topic.
Next, designate your tax year. You can chose to follow the calendar year or go by a tax year of 12 months, such as designating a date in the middle of the year as your company start date. For example, you can decide your company’s start date as August 18, which would mean your annual filings would be centered around that time going forward.
You also must choose an accounting method between a cash basis or accrual basis. You may have come across these terms in an accounting class. Basically, being on a cash basis means you record cash income as it is received, while the accrual method means you record income as it is earned but may not necessarily be received at the time, such as money earned from a long-term contract. Most small businesses go with a cash basis for simplicity.
Recordkeeping
All businesses should strive to accurately maintain records. This will be needed when filing your annual returns and can help you in case the IRS audits your tax filings. Most small businesses use accounting software like QuickBooks to keep track of their transactions and maintain a physical filing bin for their business files, such as a business charter or other founding documents. Are you curious to find out how long you need to keep your business records?
Did you find this article informative? MiklosCPA is a Southern California CPA firm with knowledge and experience in helping businesses properly prepare their taxes. Follow us at our social media pages such as Facebook and Google+ for future tax tip articles.