You may have a great idea for a startup and want to begin the process of establishing your business. You find yourself focused on marketing, advertising, financing, hiring or whatever else your company needs. But before you proceed any further, take a step back and consider the tax implications of your small business. If you do not review how the setup of your business will affect the taxes you will owe, you may end up having to pay more than you expected. Start by considering these three factors.
1. Your business structure
The most influential aspect that will affect your taxes is the structure of your business. Each business entity comes with its own tax implications.
- Sole proprietorship. You must include all profits when you file your personal income taxes. Your personal tax rate will apply instead of the corporate one, and you will have to pay a self-employment tax. Your personal assets are at risk if the IRS audits you. These qualities also apply to partnerships and LLCs (unless the LLC opts for corporate taxation).
- Corporation. Accounting is more complicated and expensive, and profits are subject to double the taxation due to shareholders. However, because a corporation is a separate entity, it qualifies for additional deductions, and your personal assets are safe.
- S corporation. This entity is not subject to double taxation, but it can face more taxes in other ways, such as through passive income.
Regardless of the entity you choose, you will need to file quarterly taxes or you may receive an underpayment penalty.
Another area to consider is the kind and quantity of deductions available that are relevant to your business. Your business structure will determine which and how many deductions you may claim. If you do not claim deductions properly, you increase the likelihood of an audit. This is also why it is imperative that you keep accurate and thorough documentation of your finances and business activity.
3. State taxes
In addition to federal taxes, you will have to pay Georgia state taxes, which include more than just taxation on your income. They also comprise sales and use taxes that depend on the type of products or services you offer. The complexity and inconstancy of these tax laws can result in you paying more than is necessary and in your tax liability increasing.
As you can see, business taxes can easily get complicated . It is wise to utilize the services of a tax attorney to ensure you choose the right business setup and handle taxes correctly.