I want to start a business. Where do I start?

There is a lot of hard work that goes into starting your own business. Establishing the product or service you will be selling, doing the research, creating a business plan, raising capital, and dealing with legal issues is just the beginning. Before starting your business you should also be aware of your federal tax responsibilities. We’ve compiled six tax related tips to assist you with starting a business.

1. You must first decide what type of business entity to establish. The type of business entity determines which tax form you will be responsible for filing. The most common types of businesses are the sole proprietorship, partnership, corporation and S-corporation. See ‘What Business Structure Should I Choose’ for a detailed explanation of each entity.
2. The type of business you operate will determine what tax you must pay and how you pay them. Four general types of business taxes are: income tax, self-employment tax, employment taxes and excise tax. Your tax advisor can assist you in determining your tax obligation.
3. An EIN (Employer Identification Number) is needed to identify a business entity. You can apply online for your EIN at http://www.irs.gov/. (You are not required to have an EIN if you are a sole proprietor or single member LLC with no employees).
4. Good accounting records will help you ensure the successful operation of your new business. The business you are in affects the type of records you need to keep for federal tax purposes. Choosing the right tax and accounting professionals is crucial when establishing and maintaining your accounting system.
5. Every business taxpayer must figure taxable income on an annual accounting period – called a tax year. The two most common tax years used are the calendar year and the fiscal year.
6. Each business taxpayer must use a consistent accounting method – which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year in which you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year that you earn it and deduct expenses in the tax year they are incurred.

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