Small Business FAQs

Choosing the right business structure is something every owner must carefully consider when starting a business. Your business organization can affect things like how much and how often you pay taxes, personal liability, and your ability to take out loans. The state in which you have your business controls business formation.

The most common forms of business include:

• Sole Proprietorships
• Partnerships
• Corporations
• S Corporations
• Limited Liability Company (LLC)

If you unsure which business entity is best for you, schedule a free consultation with one of our business coaches today!

A partnership is an agreement between two or more business owners who are invested in the company and agree to share in profits and losses. There are different types of partnerships and levels of liability, so be sure to choose the right one for you and your partner(s).

While a partnership doesn’t pay income tax as an entity, the individual partners receive a K-1 showing their share of the income, credits, and deductions. They are each responsible for reporting their share of the net profit or loss on their personal 1040 returns. The organization is responsible for business taxes and must be registered through the state.

A C corporation (also known as a C corp) is legally separate from the owners and considered a “legal person” by law. A C corp limits personal liability for its shareholders (with exceptions for certain conduct). When you incorporate a business, you enter the world of stocks, where shares can be bought and sold. Corporations are the best business formation if your goal is to be a publicly traded company. Corporations must pay taxes on profits and its shareholders are also taxed individually on dividends (profit distribution).

An LLC is unincorporated but still enjoys limited liability. Like a partnership, an LLC has “pass-through” taxation and is better for companies with one owner. Depending on how the LLC is structured and the number of owners, the LLC may be recognized as a partnership or a disregarded entity (taxed similarly to a sole proprietorship).

A sole proprietorship is the most common type of business formation. It is defined as an unincorporated business of any kind that is owned by one person, with or without employees. Although it offers the owner the most control over business affairs, they are also personally liable for financial obligations and debts. In most cases, sole proprietorships are responsible for filing quarterly estimated tax payments.

An S corporation, or “small business corporation” is similar to a C corporation, but with a different taxing structure under the IRS. S corporations have “pass-through” taxation – where profit/loss is reported at an individual level, avoiding the double taxations of C corporations. Small business owners may choose to be an S corporation to have similar tax benefits of a partnership without the tax preparation expense and complexity of a partnership tax return.

Teaming up with your spouse beyond household duties can be a great experience. You may be treated as a qualified joint venture if:

• You own a business with your spouse
• You split the business 50/50
• You are unincorporated
• You’re not considered a formal business partnership
• You file jointly with your spouse on your taxes

All individuals and business entities must pay income tax, which can vary based on the taxpayer’s income or profits. Filing a yearly income tax return is required by law to determine taxes owed or eligibility for a refund.

If you do not pay through tax withholding (or not enough), you will be required to make regular estimated tax payments throughout the year.

Estimated taxes are regular payments throughout the year for income and self-employment taxes. If you’re a sole proprietor, partner, S corporation shareholder, member of an LLC, or self-employed worker, you will need to make estimated tax payments, if required. Although there are set quarterly payment deadlines, you may also pay as you go (monthly, weekly, etc.). Check with your state for instructions specific to your business.

Excise tax is different from sales tax in that it is collected from the producer or seller and incorporated into the product price. Goods with excise tax include gasoline and alcohol. Typically, a business would collect these taxes from the customer to pay the IRS using Form 720, Quarterly Federal Excise Tax Return.

Do you have employees? If so, you’ll need to deposit payroll taxes. This includes federal income tax, Social Security, and Medicare taxes. As part of your employer obligation, you must file Form W-2 for reporting employee compensation. There are requirements for filing returns and making deposits, and the funds must be held in trust until paid to the IRS.

If you fail to deposit your payroll taxes, the IRS will assess penalties and interest fees on any unpaid taxes. The best way to avoid payroll tax debt is to file and deposit payroll taxes in a timely manner.

As a business, you may have requirements to pay sales and use tax if you sell goods. If you sell services, you typically don’t need to worry about sales and use tax, but it depends on the state rules. Some service providers (e.g. construction) may need to pay sales and use tax if an item (e.g. fabrication costs) is “sold” to the customer as part of the delivered service.

There are also complex rules concerning sales taxes for online sellers. Check with your state for specific regulations.

Work for yourself? You may be self-employed if any of the following apply to you:

• You carry on a trade or business as a sole proprietor or an independent contractor
• You are a member of a general partnership that carries on a trade or business
• You are otherwise in business for yourself (including a part-time business)

You must file an annual return if you meet the minimum income requirements for state and quarterly estimated taxes. You’ll also need to pay self-employment tax, but be wary of the self-employment tax trap.

Self-employment tax is Social Security and Medicare tax, and your payments contribute to your coverage under these programs.

Generally, if you are required to file a return, you must also pay estimated quarterly taxes which include self-employment tax and estimated income tax. This is because you’re not being paid on payroll and you don’t have an employer withholding these taxes from your paycheck for you.

To make your estimated tax payment, use the vouchers provided on Form 1040-ES (if sending through the mail) or file online through the Electronic Federal Tax Payment System (EFTPS).

First year self-employed? You’ll need to estimate how much you expect to earn. If you overestimated  your actual amount the first time, you can use Form 1040-ES to submit a new estimate moving forward.

Working from home has its perks beyond a stress-free commute and lax dress code. You may be able to deduct home office expenses on your taxes if it’s the main, exclusive space for conducting your business (e.g. using your garage gym as a personal training space).

Be careful with deductions, however, as too many can trigger a small business tax audit. The best way to maximize your business deductions safely? Work with an experienced tax professional, like those at MoneySolver, who can help you take advantage of every credit and deduction allowed.

Known as an employee identification number, an EIN is how your business is identified. Before getting an EIN, you need to have a business formation. You can apply for an EIN for free through the IRS. According to the IRS, you will need an EIN if:

• You have employees
• You operate as a corporation or partnership
• You file employment, excise or alcohol, tobacco, and firearms tax returns
• You withhold taxes on income, other than wages, paid to a non-resident alien
• You have a Keogh plan (a tax-deferred retirement pension plan, typically for available to self-employed individuals or unincorporated businesses)
• You are involved in organizations such as:
  • Trusts (with some exceptions)
  • Estates
  • Real estate mortgage investment conduits
  • Non-profits
  • Farmers’ cooperatives
  • Plan administrators

If you are a sole proprietor or self-employed, you should not need an attorney to start your business. If you have multiple partners, however, you may want to seek the advice of a qualified business attorney.

Making the decision to close your doors is never easy. If you’ve decided to call it quits, there are many details you’ll need to address, including final tax filings. To ensure nothing falls through the cracks, be sure to download our Small Business Closure Checklist from Tax Defense Network. You may also want to speak with one of our tax professionals to avoid potential problems down the line.