What are the tax implications for startups? As you begin to get your feet off the ground, it might seem a little too early even to start considering taxes and how you can reduce them. But in truth, you are in the best position you can be to not only restructure your business but plan for how your business can get important tax benefits and deductions, and avoid unnecessarily large bills.
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Here is the content that we will cover in this post. Let’s get started.
- 1. Choosing a Tax Structure For Your Business
- 2. Partnerships
- 3. LLC
- 4. C Corporation
- 5. S Corporation
- 6. Understanding The Importance of Taxes
- 7. What Are the Taxes Your Business is Liable for?
- 8. Income Tax
- 9. Estimated Tax
- 10. Excise Tax
- 11. Benefits of Taxes
- 12. A Good Record
- 13. A Helping Hand
- 14. Emergency Services
- 15. Paving the Way
- 16. Tax Return Credits
- 17. Government Benefits
- 18. Changing Your View
- 19. Keep Your Financial Information Updated
- 20. Claim Your Deductions
- 21. Tax Exemptions
- 22. Let The Professionals Handle it
Choosing a Tax Structure For Your Business
Startups have a considerable benefit over well-established companies in this regard. It might not seem like there is any way in which this could be true, but it is, especially where tax implications are involved.
As a new company, you have the opportunity and the potential to choose a tax structure that will benefit you in the long run. Therefore, the first step as a startup is to determine which corporate entity best suits your company.
A business entity is the business structure your business has. These structures have been created to help your business carry out certain activities. Your company structure is a specific system.
The organizational and tax structure determines the tax implications your business has, but it also affects the company’s internal network. For example, the internal system of your business is composed of directors, shareholders, and officers, varying types of ownership, rights, and operating agreements.
The most common business entity structures you can apply to your business in the US are:
- C Corporation
- S Corporation
Partnerships are an arrangement between two or more business partners that have agreed to create a company to further their mutual interests. Much like sole proprietorships, partnerships are not directly subjected to federal income taxes. Individual owners pay their own taxes on a pass-through basis, avoiding the double taxation of C Corps.
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An LLC is a limited liability company. An LLC is a combination of a corporation, partnership, and even a sole proprietorship but with a very restricted form of liability. If your company is an LLC, you have the added advantage of not personally taking on any debt or legal risk that the company has.
The business and the business owners are seen as entirely separate legal entities due to personal asset protection. Therefore, in terms of taxes, the profits that LLCs accumulate are taxed at the same rate as the owner’s tax returns.
C Corporations are known as standard corporations according to the IRS. C Corporations are taxed at a corporate level and maintain a level of personal asset production, meaning that the business is taxed at a different rate to the business owners. Income tax is paid by the company at a corporate level first and is paid a second time based on dividends at an individual level.
An S Corporation is a corporation that comes with advantages where taxes are concerned as S Corporations have a special tax status and tax relationship with the IRS. You can choose how you are taxed in this scenario.
So when you are considering which business entity your company should fall under, you need to consider the tax implications and the effect these tax implications will have on your business further down the line.
Remember, these entities were designed by the federal government to be governed at a state level, which means that the business entity you choose will determine how your company is taxed and what State laws your business is subjected to. Setting your business up with the correct tax implications for startups can mean that you can take advantage of some benefits and avoid tax issues.
Working out the tax implications of your startup is only one aspect of how to launch a business. If you would like more information on the other steps you’ll take, check out this video I have created.
Understanding The Importance of Taxes
Most tech startup companies begin as small to medium enterprises that are well known for embracing and capacitating flexibility, innovation, and passion for staying relevant in a constantly changing field.
As important as having a strategic plan for the future, your business must balance its technical experience and expertise with business knowledge. To find this balance, you need to understand how different processes work and how these processes are essential and beneficial to your business.
There are multiple forms of taxes, and these taxes enable and pay for certain things such as social security, medical aid, Medicaid, and many more benefits. They can even become a competitive advantage. They can also eat you alive if you haven’t planned for them.
What Are the Taxes Your Business is Liable for?
The taxes your company pays is dependent on the business entity your corporation is registered as, and these taxes may include the following.
- Income Tax
- Estimated Tax
- Excise Tax
- Capital Gains Tax
All business entities have to file for their annual income tax returns, except for partnerships, because partnerships are exempt from income tax. Partnerships don’t file income tax, but they file informational returns, and individual owners pay their own taxes. The tax form you use and how much income tax you pay is dependent on which business entity your company is registered as.
Estimated tax is paid out quarterly for the year and is based on your projections for the business. Paying estimated taxes is essentially a way to prepay your income tax in a quarterly manner.
Excise tax is an indirect tax that businesses and individuals pay more daily. These taxes are usually made and governed by federal, state, and even local governments. They can be applied to manufacturers on the production of items for sale.
Benefits of Taxes
Paying your taxes is considered a civic duty by most and helps to fund public services that many people use. Such as education, public transportation, Medicaid, etc. However, there are many benefits you may receive from paying your business taxes. Understand the tax implications for startups including:
- A Good Record
- A Helping Hand
- Emergency Services
- Paving the Way
- Tax Return Credits
- Health Insurance Benefits
- Government Benefits
A Good Record
Paying your taxes gives your business an excellent track record. Having a good track record gives you an added advantage when you are applying for loans or mortgages for your business by helping your company build a better credit history. As well as when selling your company.
A Helping Hand
Your taxes do more than fund the federal government for different programs; they also help promote and protect children’s future education. For example, taxes enable many public schools to stay open and even help to provide feeding programs to help children in need.
One of the most valuable things paying taxes provides is that it helps pay for first responder services. Taxes fund firefighters, police, and even social workers, and the work that these people do is supported by taxes paid.
Paving the Way
A public service that everyone uses is the vastly expanded network of roads in America. Taxes help to pay for the building and repairing of different routes and the expansion of new roads. Not only do taxes pave safer road networks for everyone to travel on, but they also help to maintain parks and other forms of recreational areas.
Tax Return Credits
When you pay your taxes, you get the bonus of tax return credits. The system of taxes is balanced with a system of credits and deductions. So when you pay your taxes on time, you get returns and credits in the form of tax deductions at the end of your financial year.
Health Insurance Benefits
Taxes also go to funding healthcare and help you earn credit for things like social security.
The taxes you pay do a lot to help those in need. People with low and even no income rely on the food, rent, electricity, and even medical services that taxes help fund. These benefits help people to be able to get back on their feet.
Taxes are essential and help to maintain so many different and important services. So many people have a negative outlook on taxes when they can in fact be beneficial in so many unique ways. Understand these tax implications for startups and comply with your obligations.
When looking for funding for your company, you may have to assure investors that you’re complying with taxation regulations. Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
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Changing Your View
Although they can be stressful and time-consuming, taxes are vital, not only to your business but also to the people who keep your business afloat – your employees and your customers.
Working in the tech industry is daunting, but the same way that technology can change the lives of so many people, so can taxes. Taxes go beyond just your legal responsibility. Paying your taxes is a great way to help you give back to the communities that help you.
Ultimately taxation is needed to fund several different programs and help to keep vital services updated and in excellent working condition.
While it can sometimes be an absolute pain to go through the multiple forms that sometimes seem like a never-ending pile of paperwork, taxes are worth the work. Here are a few things that can make tax a little simpler for you and your business:
Keep Your Financial Information Updated
When it comes to taxes, having your financial records on hand and, more importantly, organized helps your business save both time and money. Tax keeping is a lot of work, so whether you are doing your taxes with a financial advisor or by yourself, keeping your records will make doing your taxes much more manageable.
Plus, if your bookkeeper charges by the hour, having your financial information updated and ready to go will make the entire process much more cost-effective. This is just one aspect of the tax implications for startups.
Claim Your Deductions
Your deductible expenses actually benefit your company when it comes to taxes. As a startup, your capital needs to be managed carefully, and one way to avoid unnecessary costs is to claim your deductible expenses.
Deductible expenses are expenses that contribute to generating income but not generating capital. You can often claim back deductible expenses on the following:
- Telephone and utilities
- Office supplies
- Wages and much more
Depending on what business entity your company is registered as you could qualify to be exempt from certain taxes. These exemptions make it easier on your wallet when you do your taxes. These exemptions include (not limited to):
- Green tax credits
- Tax breaks for bringing jobs to certain areas
- Government subsidies the government has granted you
Let The Professionals Handle it
When it comes to your business, it is never wrong to ask for help in situations where you need guidance. As a tech startup company, it is vital that you acquire the right professional to handle your financial statements.
One of the best things you could ever do for your business is to get the help of a financial advisor regarding the finances and taxes of the company. Getting the help of an expert will also help you to stop making costly mistakes. Get the best tax strategists and CPAs you can.
Start your tax year in the clear by hiring the right individuals to process the financial statements of your business. When you know what to expect from your finances and your taxes, the process of taxes is much more straightforward and easier to do.
From mortgages to rent, loans, and more, the financial state of your business will have an impact on your business in the long run. To ensure that your business is living up to its potential, you need to make sure that you are in a financially secure position, and taxes can help to provide you with the credit history you need. For this reason, every entrepreneur should work with their CPA to understand the full scope of the tax implications for startups.
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