It’s easy to imagine working with an accounting firm once you have your small Nashville business up and running. But the truth is, you might need to start consulting an accountant – and particularly, a tax guru – even when your startup is still in the conceptualization phase.
Understanding how your business can be taxed is just as essential as strategizing on how your product or service will turn a profit. Here are three questions you can review with an accountant to help you determine your company’s relationship with taxes and gain an edge for your business.
How will you structure your business?
- Sole Proprietorship
- Partnership (general or limited)
- C Corporation
- S Corporation
- Limited Liability Company (LLC)
Sole proprietorships and partnerships are the simplest for small startups, but they come with inherent risks. For example, as sole proprietor, you could end up mixing personal and business funds to support your fledgling company. Alternatively, you and your partners might encounter issues about the distribution of roles and profits. Both scenarios could make tax-time a messy period, which is why it’s essential to clarify the responsibilities attached to each business type.
Who will you hire?
If you won’t be working alone, you should decide whether you will be hiring employees or contractors. The difference is crucial:
- For employees, you will have to pay social security, medical insurance, and other benefits. You will also have to provide their payroll report and complete W-2 form come tax season.
- For independent contractors, you only need to prepare their 1099 tax form if you paid them more than $600 in a year.
Note that you can’t simply consider all workers independent contractors to save money. The IRS also dictates who gets to be classified as a contractor or employee, and flouting these distinctions can raise your dues.
How can you maximize credits and exemptions?
Tax season can also be about saving money legally – if you know how.
Did you know you could claim as much as $5,000 in deductions in your first year of operation to cover the cost of launching a business? Or that you could deduct educational expenses that improve skills for your company? Hiring employees (as opposed to contractors) and offering them certain fringe benefits could actually ease your tax burdens. Donating unused and unsold inventory, instead of storing them for another year, could also do the same.
When finances are tight as you grow your business, knowing such options makes a significant difference. These are just some tips on starting a company you can learn if you consult early with your trusted Nashville accounting firm.
10 Tax Tips for Small Businesses,TIME.com
10 Tax Tips for New Business Owners, FoxBusiness.com