Entrepreneurship is a great way to reach financial independence and be your own boss. On top of that, you have more space to pursue something you’re really passionate about. Of course, with a business come taxes. There are simply too many horror stories about pursuits that crashed and burned all because of a lack of information and sound understanding of the law. In fact, the Small Business Administration revealed that 67% of small businesses fail within a decade, many in part due to not understanding the correct financial procedures. So when it comes to tax requirements and best practices, here are some of the basics you should know.
Register Your Business
One of the first things you need to prioritize is getting registered. Not only does this avoid any legal complications, but it also allows you the benefits of government deductions. For this part, you’ll need to know the difference between a sole proprietorship, corporation, and a limited liability company (LLC). Here’s a quick rundown:
This is basically the default status if you don’t register, as it means that you and your business are considered as a single entity. While it can be tempting to settle for this, it also means it’s going to be harder to separate your business and personal finances. Plus, you pretty much have liability over everything.
This takes a little longer than other options, and can be expensive as a result. The pros here are, aside from getting a fancy title like “Inc.” added to your business name, you get deductible expenses, more security for your assets, and the ability to maintain your business’s status even if you give up ownership.
This is essentially the perfect hybrid between the two previous structures. Like a corporation, you get all the benefits mentioned above, but with some of the additional benefits of a sole proprietorship. Since the name itself promises limited liability, your personal assets are protected, but you are taxed at the same rate as a sole entity. It’s more flexible and still gives you good taxation, making it a good option if you’re planning to go down the entrepreneurial path.
Study Your State Laws
Of course, certain things vary depending on your location. It’s a good idea to get the specifics down pat when considering where your headquarters will be. This way, you can be wary of potential issues or restrictions, and you can reap the benefits that cover the area.
Some states are friendlier to businesses in terms of taxes. Case in point, LLC tax benefits in Wyoming include not having any taxes on both personal income or business income, which can translate to huge savings down the line. Sales tax is also pretty low there, too. Other states, like Florida, don’t tax personal income, but do tax business income. Meanwhile, Iowa and Pennsylvania are two of the most expensive states tax-wise, as they levy 12% and 9.99%, respectively, on your business income. To make these factors work in your favor, it would be best to consult with a tax specialist so you know what to prepare for.
Know Your Deductions
Even though taxes can feel like a heavy load, businesses can always rely on tax deductions. Small businesses can write off a lot of their expenses from operational costs. Understanding this can help ease your tax burden significantly, as long as it’s in compliance with the federal laws imposed by the Internal Revenue Service (IRS).
Remember that personal expenses don’t qualify, and you can get in a lot of trouble for trying to mix that in. Certain things count, but have their own limitations, like meals on the job being deductible only up to 50% of the total. Keep a record for your own reference, especially as you’ll likely be dealing with a lot of data from your books, marketing efforts, office tools, and logistics, among others. It may help to study some of the most common tax deductions as compiled by attorney Barbara Weltman.
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