Posted by National Association of Tax Professionals

Starting a New Business? Informational guide for small business owners as they set-up their business and get started.

Starting a New Business? Informational guide for small business owners as they set-up their business and get started.

If you have a good idea, it might be time to map out all the details needed to put it into operation, and be firmly convinced of your ability to make it work. Having it all worked out in your head is one thing, but it’s only when you take the time to create a written document that embodies your thoughts that you realize the scope and magnitude of what is involved in running a business. In your head, you've concentrated on the idea. In your business plan, you can examine the nuts and bolts of running a business to make the most of your idea.

A well-developed plan can serve as one of your most important management tools. A good plan will provide a blueprint and step-by-step instructions on how to translate your idea into a marketable service or product. Once the business plan is in writing, you need to follow it so you can stay on track and avoid costly mistakes. It might also help when it comes time to find investors.

You’ll also need to develop a marketing plan. You won’t sell your product or service unless the public knows you exist. The Internet has become a great place to advertise your business, and the costs you incur are deductible as advertising expenses once the business is open. 

There are several different forms of business entities: corporations, partnerships, sole proprietorships, and limited liability companies (LLCs). What type of entity should you choose? 

A limited liability company (LLC) is a business entity separate from its owners. The major advantage is that it allows owners to participate in the management and to take advantage of the pass-through taxation while limiting their liability for debts or the business. LLC members have limited liability that is usually only common in corporations.

A single member LLC is taxed as a sole proprietorship by default; an LLC with two or more members is taxed as a partnership by default. Either LLC can elect to be taxed as a corporation.

The other attributes of the LLC usually will be determined by how the LLC is taxed:

An LLC taxed as a corporation follows the corporation rules.

An LLC taxed as a sole proprietorship follows the sole proprietor provisions.

An LLC taxed as a partnership follows the partnership rules. 

For example, an LLC taxed as a sole proprietor will not issue a Form W-2 to the single member for services provided, because a sole proprietor cannot issue a Form W-2 to himself or herself. The same is true for an LLC taxed as a partnership; members will not receive a Form W-2 from the partnership. However, an LLC taxed as a corporation will issue a Form W-2 to a member who provides services.

An LLC is formed under the state where the business is conducted. An LLC’s Articles of Organization usually define who will be responsible for managing the company. Liquidation of the LLC will depend on how the entity is taxed.

Getting good advice from your tax professional prior to starting any business activity will save you time and money later.

A business owner who keeps good records is able to easily monitor the progress of his or her business. Records can show whether the business is improving, what items are selling, or what changes may be necessary to make it more profitable.

Keeping good records can increase any business owner’s chances of success. Records are needed to prepare your financial statements. Income statements and balance sheets are used to prepare your income tax returns. Saving your receipts makes it easy to keep track of which expenses are business-related and which ones are not. Keeping good records also helps you to distinguish between taxable and nontaxable income.

Keeping track of expenses lessens the chance that you’ll forget which expenses need to be deducted when it comes time to prepare your tax return. Any record that supports the information reported on your tax return is a record worth saving. If the IRS audits your tax return, having a complete set of records for the year in question will speed up the examination process.

If you started a new business this year, chances are you have incurred certain costs that may require special treatment on your tax return. These expenses, appropriately called start-up costs, may include fees you paid for professional and consulting services. They also include money you spent on advertising or lining up suppliers and distributors. 

If the total amount of these expenses does not exceed $50,000, you can deduct up to $5,000 in the year you start the business. Any amount over $5,000 is amortized (similar to depreciation) over 15 years. If the expenses are more than $50,000, you generally are not allowed this option and will have to amortize the total costs over a 15-year period. For businesses that qualify, the ability to expense $5,000 of start-up costs is a great option.

Many small business owners use bartering as a way to save a little money. But many do not realize the tax consequences associated with bartering. When bartering occurs, there is usually no money exchanged, just goods and/or services.

In general, you are required to issue a Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, to the party you traded with. This form indicates the fair market value of the item you traded.

The fair market value of the item you receive is income to you and is taxable in the year the service is received. Your bartering activities also may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss. In addition, the fair market value of the item you traded, may also be deductible to the extent the barter received is a deductible expenditure. Bartering income may result in liabilities for income tax, self-employment tax, employment tax or excise tax.

Your tax professional will be able to help you set-up your business.

National Association of Tax Professionals