LUTZ BUSINESS INSIGHTS
the building blocks for a start-up business
ashley englund, tax director
There are so many exciting things to do when starting a business – picking a name, designing a logo, creating a website, etc. Who wants to think about taxes or a business structure? Although this might not be the most exciting piece of your start-up, if you don’t take time to consider these details, you could find yourself regretting them for years to come. Let’s look at three areas that can impact your business today and into the future.
If you were going to build a building, you would not do it without making sure you were building on a strong foundation. The same concept applies to starting a business, and your foundation is the business structure you choose. There are many ways a business can be structured. For example, if you are the sole owner of your business, you can operate as a sole proprietor, a Limited Liability Company (LLC), or a corporation. The only thing you can’t do is form a partnership. Partnerships require at least two owners. Each business entity has its advantages and disadvantages, including the following highlights:
Most states do not require you to file papers or form a business entity to operate as a sole proprietorship. The name of the company is the name of the sole proprietor unless the owner applies to use a tradename. For tax and liability purposes, the business and its owner are the same. If a creditor sues the company, your personal assets are at risk. The business does not pay taxes. All expenses and income are reported on the owner’s tax return.
Partnerships operate in the same manner as sole proprietorships. The business and its partners are considered to be the same for tax and liability purposes. All profits are passed through to the partners who report them as income and pay taxes. Partnerships like sole proprietorships do not protect the partners’ personal assets.
Limited Liability Company
LLCs require legal filing to receive the benefits of separating the business from personal assets. This separation is one of the primary benefits of an LLC, as opposed to a sole proprietorship or partnership. The company does not pay taxes. All profits appear on the owners’ personal returns. An LLC can choose to be taxed as a sole proprietorship, a partnership, or an S corporation.
As an incorporated business entity, S corporations are separate from their shareholders. However, they do not pay taxes. All profits are passed through to the shareholders. Shareholders report the income on their tax returns.
C corporations are separate entities for legal and tax purposes. The Corporation’s assets are separate from the assets of those owning the Corporation. C corporations are tax-paying entities. In addition, shareholders pay taxes on any dividends that are received, resulting in what is commonly referred to as double taxation of the income.
Hand in hand with the decision of how to structure your business comes the various taxes that apply. As you decide what type of business entity is right for your start-up, be sure to consider taxes.
All for-profit businesses pay federal income tax at some level, whether it be corporate or individual. Some companies also pay state and local taxes. In addition to income taxes, businesses may pay some or all of the following:
Although payroll taxes such as Social Security and Medicare are taken out of an employee’s paycheck, the employer also pays a percentage based on the gross pay of the employee. In addition to FICA taxes, employers pay federal and state unemployment.
Not every state has a sales tax. For those that do, you must make sure you are collecting and paying the required sales tax. That includes products sold online.
Personal Property Taxes
If your business owns tangible, depreciable property, such as equipment, you may have to pay personal property taxes. These are based on a percentage of the assessed value of the property.
In sole proprietorships and partnerships, business owners are not employees and do not receive a paycheck. That means Social Security, Medicare, and income tax are not withheld. To cover Social Security and Medicare, business owners pay a tax based on the business’ profits. Owners also may pay an estimated income tax every quarter to compensate for no income tax being withheld.
Some states may impose a gross receipts tax instead of a sales tax. Franchise taxes can apply based on the value of the company. Excise taxes may be applied if certain types of resources, such as fuel, are used.
Your business structure has a direct impact on the amount of tax you pay. Take the time to evaluate which structure is best for the way your business will operate.
A majority of entrepreneurs start a business because of their passion for what the business is and will accomplish. Therefore, before you become engulfed in day-to-day operations, it is critical to think about how technology can help you operate more efficiently. Leveraging technology is the best way for you to continue to use your time to further the business goals and the passions you have. Below are a few ideas about how technology can assist business owners.
- Project management software can help you set and maintain schedules.
- Customer relationship management (CRM) packages can help you acquire and retain information about your customers.
- Marketing automation can work with a CRM package to deliver email campaigns while you sleep.
Accounting is crucial to operating your business. You can look at different accounting packages that will require you or an employee to maintain. Or, you can look at outsourcing your accounting to a service that can do the work for you, freeing you to work on what you started your business to do. For information on accounting services or consulting on the above building blocks for a new business, contact us.
ABOUT THE AUTHOR
ASHLEY ENGLUND + TAX DIRECTOR
Ashley Englund serves as a Tax Director at Lutz with over six years of experience. She is responsible for providing tax and consulting services to clients, managing client relationships, and assisting in leading accounting operations in Lutz's Central offices.
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- National Association of Certified Valuators & Analysts, Member
- Hastings Young Professionals, Member
- Certified Public Accountant
- Certified Valuation Analyst
- BS in Accounting, Nebraska Wesleyan University, Lincoln, NE
- Hastings Literacy Program, Board Member
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