Have you ever considered starting your own business? According to a recent survey, the rates of early-stage entrepreneurial activity surged in 2011, jumping nearly 60% in the U.S. More than 12% of U.S. adults reported starting a business or running new businesses last year. This is an increase of 4% from 2010. [1] In our current economic situation, many are turning to entrepreneurship. To help you get started, we have compiled a list of seven tax tips.
1. Determine the Legal Structure of Your Business
First, you must determine the type of business you are going to establish. The most common entities are a Sole Proprietorship, Partnership, Corporation, S Corporation or a Limited Liability Company (LLC). Consider the legal and tax implications of each type. This is important when it?s time to file your tax return, as the type of business will determine the tax form you will use.
2. Know Your Business Taxes
Depending on the type business that you establish, it will also determine the type of taxes you will pay. The most common types include income tax, self-employment tax, employment tax and excise tax.
3. Determine Your Tax Year
You will need to determine if your business will run on a calendar year or a fiscal year. A calendar year begins on January 1st and ends on December 31st. A fiscal year is 12 consecutive months ending on the last day of any month, except December. This is important, as it will determine when you file your tax return.
4. Obtain an Employer Identification Number
To identify a business for tax purposes, you typically need to obtain an Employer Identification Number (EIN), also known as a Federal Tax Identification Number. You can apply for this online at irs.gov. Be sure to check with your state to determine if you need a state number or charter.
5. Determine Your Accounting Method
There are two different accounting methods you can use when running a business. The first type is Cash Accounting. This method records accounting events when they become tangible. The second type, Accrual Accounting method records accounting events in real time, or as they happen. Whichever method you choose, remember that you must be consistent.
6. Register a Business Name
Register your business name with your state government. You will need to do this if you choose to name your business something other than your own personal name. Not all states require the registering of DBAs, so check if your state does. [2]
7. Keep Good Records
To help tax time go smoothly, keep good records. Keep a detailed record of all income and expenses. This will help keep track of deductible expenses on your tax return. Keeping good records will also help you monitor the progress of your business and provide a financial overview of your company. Good record keeping also helps when facing an IRS audit.
Sources:
[1] Bloomberg Businessweek, http://www.businessweek.com/small-business/startup-rates-surge-in-the-us-and-abroad-01202012.html
[2] SBA.gov, http://www.sba.gov/content/register-your-fictitious-or-doing-business-dba-name
[3] IRS.gov
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