Small businesses and taxes, part 1: getting started

As someone who would like to open a small business, you have probably gotten used to politicians' praising your job-creating virtues and promising to lighten your regulatory load.

Such statements are not always very substantive or specific. But they serve as an indirect reminder that smart handling of tax issues can play a key role in business success.

In this two-part post, we will take note of some important things to know for would-be business owners.

Both federal and state law are involved in business taxation.

Businesses are of course formed under state law. The options range from sole proprietorships to limited liability companies (LLCs). Corporations and partnerships are also among the possibilities.

But how a business is taxed depends on federal law. The form for choosing your entity classification is Form 8832.

The best choice for you depends on your unique circumstances. It will include consideration not only of tax issues, but also ways to limit personal liability exposure and comply with recordkeeping formalities.

Regardless of the form of the business, several different types of taxes are involved.

Income taxes are only one several types of taxes that affect businesses.

Employment taxes are often called payroll taxes. Businesses can run into tricky issues on these taxes regarding who is classified as an employee and who is a contractor subject to self-employment (SE) tax.

Sales taxes are generally imposed at the state or local level, not by Uncle Sam. But there are also certain federal excise taxes that affect certain industries.

EIN, not SSN: Handling bank accounts correctly is key.

Small business owners sometimes get into trouble by using funds from a business account for personal purposes.

A best practice is therefore to set up a separate bank account for your business, using the Employer Identification Number (EIN) that you obtained for your business from the IRS. Using this number for your business account is preferable to using your own Social Security Number (SSN).

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