What Are the Tax Issues to Address When Starting a Small Business?

 Posted on June 06, 2024 in Small Business Taxes

When starting a small business, there are a variety of tax concerns and other legal issues that will need to be addressed. Navigating the complex landscape of business regulations and state and federal taxation can be a daunting process, but by taking the correct steps when founding a business, a business owner can help avoid penalties or other complications in the future. An attorney who has a strong understanding of tax law and business law can provide invaluable guidance for small business owners, ensuring that they meet all of their legal requirements and are positioned for ongoing success.

Choosing the Right Business Structure

The structure selected for a small business will affect tax obligations, liability, and operational flexibility, among other legal and financial aspects of ongoing business operations. Some of the most common options for business structure include:

• Sole proprietorship: This option provides tax simplicity, since a business will be considered part of the owner’s personal assets, and business income and expenses will be reported on their personal tax return. However, the owner will be personally liable for all business debts and other liabilities.

• Partnership: When a business is owned by multiple parties, each partner may report their share of income and losses on their personal tax returns. Liability issues in a partnership will be handled in a similar manner as a sole proprietorship unless a limited partnership is formed that will limit liability for one or more partners.

• Corporation (C or S): C corporations are taxed at the corporate level, and S corporations pass income through to shareholders' personal tax returns. Because corporations are legal entities separate from their shareholders, owners will be shielded from liability.

• Limited Liability Company (LLC): This option provides many of the advantages of corporations while allowing for increased flexibility in management and organization. Members of an LLC can usually benefit from pass-through taxation, and they will be protected against liability.

In most cases, a California business must be registered with the California Secretary of State (SOS). This process involves filing the necessary documents, such as Articles of Incorporation for corporations or Articles of Organization for LLCs, and paying the required fees.

State and Federal Taxes

Businesses will be required to pay taxes at both the state and federal levels. Federal taxes must be paid to the IRS, and they may include:

• Income taxes: Businesses will typically be required to file annual income tax returns. However, for partnerships, annual information returns must be filed. Depending on how the business is structured, corporate taxes may apply to the profits earned, or taxes may be passed through to owners, partners, or shareholders.

• Employment taxes: A business will be required to withhold taxes from the wages paid to employees. These include income taxes and Medicare and Social Security taxes.

• Excise taxes: These taxes may apply if a business manufactures or sells certain products, engages in certain activities, or provides certain types of services.

California state taxes are handled by different state agencies, including:

• Franchise Tax Board (FTB): This agency collects most personal and corporate income taxes, as well as franchise taxes.

• California Department of Tax and Fee Administration (CDTFA): This agency manages sales taxes, use taxes, and other state taxes.

• Employment Development Department (EDD): This agency oversees unemployment insurance and state disability insurance taxes.

• Department of Alcoholic Beverage Control (ABC): If a business manufactures, distributes, or sells alcoholic beverages, it will be required to pay alcoholic beverage taxes to this agency.

Contact Our San Jose, CA Small Business Tax Lawyer

Navigating the maze of tax regulations and other laws that affect small businesses can be a complex task. At John D. Teter Law Offices, our San Jose business law and tax law attorney can provide tailored advice on how to address these issues correctly, ensuring that all legal requirements have been properly addressed and that a business will be able to operate successfully. To learn more about how we can assist with these issues, contact our firm at 408-866-1810 to set up a consultation.