Category Archives: Legal

Tax Obligations for New Businesses

If you’re new to business, then wrapping your arms around your tax obligations can seem like an uphill task. The first question you need to ask yourself is which tax laws impact your business from the get-go? It may be safe to assume that your tax obligations kick in once you start making a profit. Not necessarily. Each business is different.

If you hire employees, you’ll have payroll tax obligations. If you operate a retail business, there’s sales tax to deal with. Then there are quarterly estimated tax payments (the self-employed equivalent of withholding).

To help you navigate the business tax landscape, here’s a quick overview of key tax obligations that may impact you.

Related: Behaviors of Successful People

Understand how your Business Structure Impacts your Tax Obligations

How you legally structure your business will affect your tax situation. For example, if your business is an LLC, the LLC gets taxed separate from the owners. While sole proprietors report their personal and business income taxes on the same form (Form 1040).

At the state level, you will encounter several tax obligations – sales tax, property tax, income tax, unemployment insurance tax, and more. The SBA offers more information on how your business structure determines your tax obligations (plus links to the necessary forms and portals for registering your business with the right tax authority):

Get a Federal Tax ID

An Employer Identification Number (EIN) is the business equivalent of your social security number. It’s is required by businesses who have employees, operate as a corporation or partnership, and other obligations. For the most part sole proprietors don’t need and EIN and can operate using their social security number. Does your business need an EIN and how do you get it? Learn more.

Related: Make The Entrepreneurial Difference

Pay Estimated Taxes

This one is easily overlooked, especially if you are new to business and previously had all your income tax payments taken care of through withholding. Each quarter, self-employed business owners must estimate their federal and state income tax payment and send a check to the IRS and their state treasury. This “pay-as-you-go” model applies to sole proprietors, partners, and S Corporations who expect to pay $1,000 in income tax in one year. The threshold drops to $500 for Corporations.

To help you calculate your estimated tax, check out the IRS Estimated Tax guide. Consult your state’s treasury office (you’ll find website links for each U.S. state here) to get the appropriate tax voucher or pay online.

It’s very important that you set aside sufficient to meet your estimated tax payments or you risk a cash flow problem. And don’t forget to keep good records of your income and expenses. The latter can be used to offset how much estimated tax you pay.

Sales Taxes – Does It Apply to You?

Sales tax applies to certain retail products (rarely services) and if your business has a physical presence in a state, such as a store, office or warehouse, you must apply for a sales tax permit and collect applicable state and local sales tax from your customers. That tax is then passed on to your state revenue office on a monthly or quarterly basis. Determining whether your business qualifies as having physical presence in a particular state (say, if you own a warehouse in Virginia but sell your services in Pennsylvania) and the implications on sales tax collection can be confusing. Certain states are exempt from sales tax including Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.

Related: Marketing Tools Entrepreneurs Should Keep Handy

Employment Tax – Withholding and Matching

If you start your business and immediately have employees on payroll, you’ll need to withhold Social Security (FICA), Medicare and federal and state income taxes from their salaries. You must also match your employees FICA and Medicare taxes and pay this matching along with your employee’s tax.

The IRS Employment Taxes guide has all the information you need to understand how you deposit and report employment taxes, key due dates, and more. Take a look at this guide to hiring your first employee too.

Working with Freelancers and Independent Contractors? – Know your Tax Obligations

Bringing on a self-employed contractor brings with it additional tax ramifications, especially if your business accidentally or deliberately misclassifies that individual as an employee. Read more about why it’s important to know the difference and how it can impact your tax situation.

Bookmark Tax Reporting Season in Your Calendar

The new year brings with it several tax obligations for employers. While you’re busy thinking about getting your income tax return filed, don’t forget your wage reporting obligations (W2s must be filed) and 1099 forms must be filed and issued to independent contractors you’ve worked with during the tax year.

Related: Corporation or LLC? What’s Best for Your Company?

Property Tax

Your local government (town, city, or county) collects property tax for business assets such as vehicles, computer equipment, software, and more. Likewise, if you do business in a commercial real estate location, the state will collect property tax on it. Check with your local tax authority to find out what you need to do to register your property and the process for assessing and making payments.

Additional Resources

For more small business tax help visit SBA’s Filing and Paying Taxes guide. The IRS Guide to Business Taxes is worth a bookmark too.

Related: Productivity Tools You Need In Your Toolbox

Credit: Caron Beasley via Small Business Association

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Corporation or LLC? What’s Best for Your Company?

When it’s time to incorporate, many small business owners find themselves wondering which business type to choose. Gaining a clear understanding of your options can feel overwhelming, especially if you’re just getting started. Let’s take a look at some consideration points when comparing LLC vs. corporation options. But first, let’s start with a quick definition of what it means to incorporate.

What is incorporation?

When you incorporate a business, you evolve from a sole proprietorship (or general partnership) into a company that’s formally recognized by its state of incorporation. In other words, it becomes a legal business entity of its own — separate from the individuals who founded it. The new company structure often falls into two categories: a limited liability company (LLC), or a corporation (corp). In this article, we’ll be focusing on LLCs, as well as two popular types of corporations — an S corporation (S corp) and a C corporation (C corp).

No matter how you choose to incorporate, there are certain benefits you can expect — like being shielded from personal liability, as well as increased credibility with customers. There are also additional advantages and disadvantages associated with each incorporation type.

Related: How to Name Your Business

LLC vs. corporation: What’s the real story?

All incorporation options are not created equal. When deciding between a corp vs. LLC, the best choice for your business not only helps you start off on the right foot, but also acts as a foundation for your company’s ongoing success and growth. As you consider which business type is right for you, thinking both about your short and long-term goals for your company is advisable.

Limited liability company benefits

LLCs protect business owners, also referred to as members, from being held personally liable for the actions of the LLC. This limited liability typically protects you from the personal risks involved if a lawsuit were to arise concerning your business — safeguarding your personal assets. A couple additional benefits of an LLC include:

  • Flexibility in management. Corporations have a set management structure where directors oversee the major business decisions and officers are responsible for the day-to-day running of the business. LLCs do not have the same formal management structure.
  • Pass-through taxation. With pass-through taxation, taxes are not paid at the business level. If you choose to become an LLC, income/loss would be reported on your personal tax return. If any taxes were due, they would be paid on the individual level.

Related: Your Startup is Up and Running. What Now?

Corporation characteristics

When evaluating types of corporations, many business owners consider taxation to be the most noteworthy difference between S corporations and C corporations. In a nutshell, an S corp is a “pass-through” tax entity, like the LLC. In contrast, C corps are taxed as separate entities. They are also subject to “double taxation” if corporate profits are distributed to owners (shareholders) in the form of dividends. C corporations pay tax on their profits first at the entity level and then owners pay taxes at the individual level on profits received as dividends, resulting in the double tax.

LLC vs. corporation: Other key differences

We’ve already noted taxation and management as two distinctions between limited liability companies (LLCs) and corporations, but there are other key differences worth highlighting, including:

  • Business losses. The “S corporation advantage,” allows business owners to use business losses — like those incurred during the startup phase — on their personal tax returns as deductions.
  • Self-employment taxes. An S corp can provide savings on self-employment or Social Security/Medicare taxes, and it allows owners to offset non-business income with losses from the business — unlike a C corp which is a completely separate tax entity.
  • Ownership restrictions. Neither the LLC nor the C corporation have restrictions on the number of owners the business can have or who can be an owner. S corporations, however, have a number of restrictions. S corporations can have no more than 100 owners, and owners cannot be “non-resident aliens.” Additionally, S corporations can not be owned by C corporations, LLCs, other S corporations or non-qualified trusts.
  • Dividends and venture capitalists. C corps are often the preferred incorporation choice of developing businesses. Owners can hold different types of stock interests (including preferred and common stock), which allow for different levels of dividends. This is one reason why venture capitalists choose C corporations when they offer funding to a business. Investors are attracted to the prospect of dividends (often higher dividends) if the corporation makes a profit.
  • Earnings. C corps can retain and accumulate earnings (within reasonable limits) from year to year.

Related: Improve Business Profits and Make My Business More Profitable

Making your choice

Need more tools to decide between an LLC vs. corporation? Our Incorporation Wizardcompares multiple business types based on the specific contingencies you enter, and our Business Type Comparison gives you an at-a-glance snapshot of how different business types compare on different characteristics. Of course, for questions specific to your particular situation, it is best to seek the advice of an attorney or accountant.

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CMG Business Group…. Propelling Industry to New Heights!

#cmg #cmgbusinessgroup #business #commerce #smallbusiness #startup #resource #program #management #resource #trade #sales #retail #economy #logistic #advocacy #ecommerce #federal #local #municipal #contract #market #staffing #advertise #professional #sixsigma #iso #entrepreneur #green #initiative #negotiate #consult #strategic #sourcing #strategy #presentation