Don't Mess With Taxes

Photo by Amina Filkins

If National Small Business Week has you thinking about starting your own company, congratulations. You’ll be joining a growing sector of the U.S. economy.

The Small Business Administration (SBA) describes a small business as one with fewer than 500 employees. That covers enterprises from one-person shops to manufacturing facilities with hundreds of workers.

The U.S. Census Bureau’s Business Dynamics Statistics indicate there were 5,358,600 firms that met that definition in 2021, the latest year for complete data. That was an increase from 5,322,155 in 2020.

But small really is key here.

County Business Patterns (CBP) data shows that 56.6 percent of all U.S. employer establishments in 2021 had fewer than five employees. Again, that's up from 55 percent such very small firms in 2020.

Becoming your own boss can be challenging. But you have a better chance of your firm succeeding if you start it out on the right business, and tax, foot.

Here, from the SBA, Census Bureau, and Internal Revenue Service, are 11 tips, and resources, to help you start your new business.

1. Conduct market research. Market research will tell you if there’s an opportunity to turn your idea into a successful business. It’s a way to gather information about potential customers and businesses already operating in your area. Use that information to find a competitive advantage for your business. The Census Bureau has a webpage with free resources, data tools, and training opportunities for small businesses.

2. Write your business plan. This document is the foundation of your business. It’s a roadmap for how to structure, run, and grow your new enterprise. Lenders and/or potential investors will want to see your business plan. Its information also is a good compendium of data you can use to convince people that working with you as clients or customers is a smart choice.

3. Find business funding. Your business plan will help you figure out how much money you’ll need to start your business. If you don’t have that amount on hand, you’ll need to either raise or borrow the capital. This initial financial decision could affect how you structure and run your business. There are several different business funding options, from conventional loans, investors, venture capital money, even crowdfunding. If you go the loan route, check into SBA-guaranteed loans. 

4. Pick your business location. The real estate mantra of location, location, location also could have a major impact on your business’ success. Depending on your venture, it might make sense to start your company from your home. That space could save you some money and even provide some home office tax benefits. Other operations will need a separate physical location, which entails more research and, of course, money. You’ll also have to deal with local zoning laws and regulations, licensing requirements, and taxes and fees. So take time necessary to conduct a thorough search for your business location.

5. Choose a business structure. The legal structure you choose for your business will impact your business registration requirements, how much you pay in taxes, and your personal liability. My post with tips on business entities and taxes has more.

6. Choose your business name. Picking a business name is not something to take lightly. You’ll want one that reflects your brand and captures your spirit. You’ll also want to make sure your business name isn’t already being used by someone else.

7. Register your business. Once you’ve picked the perfect business name, it’s time to make it legal and protect your brand. How and where you need to register your business depends on its structure (#5 above) and business location (#4). If you’re doing business under a name different than your own, you’ll need to register with the federal government, and possibly your state government.

8. Get federal and state tax IDs. If you’re a sole proprietor working from home, you should be OK using your personal tax ID number. But if you have grander goals for your new business, especially when it comes to hiring employees, you’ll need a federal Employer Identification Number (EIN). You use this business tax identification number to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits. There’s no cost to get an EIN; you can apply online at IRS.gov. Some, but not all, states also require you to get a tax ID as well.

9. Apply for licenses and permits. Depending on your business, you’ll need to get state (and local) licenses and permits. The necessary documentation vary by industry, state, location, and other factors.

10. Open a business bank account. Government officials, especially tax agencies, as well as financial supporters, want assurances that you’re opening a legitimate business that will make money. One easy way to show that is by opening a business bank account. This separation of business and personal finances also can help you handle legal, tax, and day-to-day financial matters more smoothly. If your financing is from a bank loan, it also should be able to help you establish a corresponding account. But it doesn’t hurt to check around for an account with low (or no) fees. Don’t forget about credit unions.

11. Hire a tax advisor. This is last on this list, but it’s a step you should make early in your business formation process. A tax professional who specializes in small businesses matters can help you with entity choice, choosing whether you want (or must) operate on fiscal or calendar tax year, and then meeting your various federal and state tax needs. A tax pro also can make sure you and your company don’t overlook any federal and state tax breaks that could help keep your company operating.

Now, take a breath. Lock down the details for your business’ grand opening. Then cut the ribbon and start ringing up sales!

You also might find these items of interest:

• Being the boss tax basics
• The latest state business tax policy winners
• The importance of good, and separate, business records

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