 internal revenue service IRS tax news aspiring entrepreneurs learn the basics of setting up a business oh okay IRS you're gonna tell us the basics of how to set up a business uh I mean honestly the IRS is just gonna tell us the basics of how to give the IRS our business proceeds not how to make the business actually work and if the business doesn't make any proceeds trust me the iris has nothing more they want to teach us i'm telling you the iris teaching us how to make our business work it's like my cousin's five-year-old kid teaching their dad how to run his business while reminding him incessantly of her birthday coming up teach us the basics of i mean is it just me or is the wording we see these days often misleading and manipulative anyways first an attempt at a joke i heard some crazy dude saying he was living off the fat of the land isn't this great stan living off the land no it sucks i hate and i can only imagine he was actually hunting for his food others hunt for food the only thing i'm hunting for is an outfit that looks good his pray being the average american is terrifying who wants to look like a big fat pig lost names man no two jews got off no uh syrian uh irs tax tip 2022-12 8 august 22nd 2022 new entrepreneurs can start out on the right foot by making sure they understand the tax responsibilities of running a business it's not too difficult in theory the irs being like my cousin's five-year-old kid with her birthday coming up they want your money so that's the first thing to get down get to understand so the process can seem daunting but irs.gov irs.gov has resources to help new business owners and there's a link to those resources here here are a few things new entrepreneurs need to do when starting their business choose a business structure the forms of business determines which income tax return a business taxpayer needs to file the most common business structures are so note this is going to be an important kind of component because it does have an impact on like how much administration stuff you're going to do and tax impacts related to it as well so there's a lot uh within these topics i just want to note however that when you're talking to professionals about what kind of structure that you should have in place you need to be aware that if you're talking to someone that is in the business like a lawyer or a cpa firm that is in the business of setting up like a partnership or an s corporation or so on they might have somewhat of a bias because of course that's their business to set up those kind of business entities so you want to kind of take that into consideration and possibly if you're thinking about changing your business entity type for example or setting up a business then you might want to be talking to someone who is not going to be involved with the administration of the taxes related to it so that you can get kind of an independent decision and try to weigh the pros and cons and then go into the decision making process so for example we got a sole proprietorship we got a partnership we got a corporation an s corporation limited liability company so the sole proprietorship is the the thing about it is it's the easiest thing to set up so if you're if you were for example a w2 employee and now you're picking up some gig work or something like that then you're most likely going to be set up as a sole proprietorship because that's just the easiest thing to do if you start making money and you're not making money through a w2 then the iris still wants some of it right how are you going to report it to the irs you're going to report it on a schedule c typically so anybody that's making you know basically money a sole one individual that's not under the umbrella generally of a w2 will basically kind of by default be in a sole proprietorship now that doesn't mean that you don't have other like state and local responsibilities like possibly setting up license and business license and that kind of stuff but from the irs side of things which is the federal side of things then then you're basically just all you have to do is basically start making money right and then you're going to be reporting it on the schedule c so the beauty of that is it's basically easy so you got the sole proprietorship an unincorporated business owned by an individual there's no distinction between the taxpayer and their business we have a partnership now a partnership is similar to a sole proprietorship but now you have two people that are kind of going into something and making money now just be aware that a partnership although it's kind of simple in its structure that the distribution of the revenue between the two partners can be complex and you might need another tax return which is a flow through tax return in order to properly report it oftentimes unless it's an exception like a married couple might have some exceptions to that for example but that does add a level of complexity also note that if you are a sole proprietorship and you want to take on and do business with somebody else you could then partner with someone else however when you do that then you're also like any kind of partnership you're both of you are responsible kind of for the decisions of the other partner and you got to make clear what the what the distributions are going to be from the income and so on and so forth and of course your your control over the business is going to be divided in that instance as well and you have to be clear and lay those things down or people are going to have different they're going to be if you got two partners going in the different directions and then obviously that's going to be causing a problem in the future so the other option is if you're a sole proprietorship and you want to pick up some someone else is to hire them as an employee or to pick up someone else as a contractor so now they're working as an independent contractor possibly depending on you know the nature of your setup you got to make sure that they are in alignment with a contractor or employee whichever would work if that's the other the way you want to go but just be aware of partnering up with one or multiple people then adds a whole lot of complexity as opposed to a sole proprietor because a sole proprietor you know has the capacity as a small business one person if they have the vision of whatever they're going to do can basically implement that pretty pretty well if you have a if you have multiple people in a small business then you have multiple different directions that can be kind of kind of difficult unless everybody's again in the in the same lineup and you want to make sure that you have that whatever everybody's goals are listed down who's going to get how much revenue and so on and so forth what's going to be the revenue split and so on and all that kind of stuff should be laid out well but you still have liability issues with the standard partnership as you do with the sole proprietorship it's an unincorporated business with ownership shared between two or more people the corporation then is going to be breaking out this is when you get you know obviously larger at that point in time and you might be into a into a situation now where you know you've got you've got more people involved and you're going to be making more decisions meaning one person for example you often are getting to the size of the business that one person can't really run everything at that point in time right so now you've got multiple people you need a structure a management structure to run and specialize in particular areas possibly of the business usually a C corporation would mean that you're large you know you're larger because there is more cost with setting up a C corporation and that's why they set up these s and limited liabilities we'll talk about second but that also known as a C corporation it's a separate entity owned by shareholders so the beauty of that is now you've got this separate legal entity and in theory the separate legal entity also comes with liability protection so when you're talking to someone that's in the business of setting up C corporations as corporations limited liabilities they're going to always say and it's true that the sole proprietors have more liability uh exposure whereas the corporation is a separate legal entity meaning with a sole proprietor they can go after like your home or something like that more easily than in a corporation now you can kind of safeguard against that to some degree and a sole proprietorship with insurance you could try to buy of course liability insurance which you probably want and in either case and if you're if you're starting out and you don't have any money then it might not be you know saving someone from suing you when you don't have anything you know is is not may not be as as big of a problem but obviously if you as you get more and more money then you're more of a target for people wanting to sue you so then you could use more protection at that point in time but the corporation also has problems with a smaller type of company because there's generally double taxation because when you draw the money out as a dividend as a sole I mean as a draw for sole proprietorship or partnership then you're not taxed on it it's only taxed one time basically on your individual tax return when you earn it but a corporation because it's a separate legal entity actually pays taxes as that separate legal entity the tax return is not just a pass through or flow through tax return they're like a separate individual that pays taxes and then when they give you the money in the form of dividends you might have to pay taxes again because now you got dividend income so the way around that double taxation they set up s corporations and limited liability companies so and these are an attempt to have the best of both worlds and so if you're if you're thinking that you're a sole proprietorship and you're talking to some a CPA or a lawyer that specializes in setting up businesses for small businesses they probably specialize in s corporations set up and limited liability setups and they could be they could have some good benefits for you but they also come with costs because it's a lot more work to do the to do just the the paperwork and all that kind of stuff for the s corporation the limited liability for example then a sole proprietorship because all you do there is file a schedule c here you have to file a separate tax return you have to have a flow through you might have to actually have payroll even if you're only one individual with no with no employee ease and so on so it can get a little bit more tricky to know exactly what's going on here so so there's some good reasons because you should have liability protections and so on to go over to here but it's also a substantial more administrative work and confusing confusion factor comes into play and you're going to be more tight in and need professional help most likely from a tax professional and so on to make sure that you're managing and guide you in terms of how you're reporting things and so on when you go here so that's the step to kind of be careful of it's often for a sole proprietor or a small business the question of should I be a sole proprietorship and then as I grow should I create partners or will the partners splinter our my my overall mission which I'm clear about right or or can we synergize together and the partnership is going to work together you got to make sure you or once you're in here should I level up to an s corporation or a limited liability possibly to have payroll I mean liability protection there which again you can think about you might be able to be taking with liability insurance instead of doing that possibly but you have to consider the costs related to it and then you might also have tax implications with moving up to the s corporation as well there could be benefits often on say the say the the federal side like a s corporation you might have some payroll tax benefits and some some tax benefits related to social security and Medicare but again you might have to process payroll which you wouldn't even have to do if you if you didn't have any employees and you were like a sole proprietorship or something like that and you might have state tax problems as well because the state might charge you fees quote end quote or which is basically a tax even though it's a flow through entity that's not supposed to be subjected to taxes so any case s corporation a corporation that elects to pass corporate income losses deductions and credits through to the to the shareholder limited liability company a business structure allowed by state status now these two the decision between these two will often be dependent in part by the state that you're in and what kind of benefits you're trying to get and the industry that you're in so you want to make sure that you have a advisor that's that's advising you properly kind of between these two options and oftentimes tax pros specialize in one of these two options or possibly specialize in a particular industry which leans towards one of these two options for whatever reasons uh related to that industry so be aware so choose a tax year a tax year is an annual accounting period for keeping records and reporting income and expenses a new business owner must choose either you got the calendar year consecutive months beginning january first ending december 31st you got the fiscal year 12 consecutive months ending on the last day of any month except december so most people probably do in the calendar year but for certain uh reasons you might want the the another year of fiscal years still got to be like that 12 consecutive calendar months and there could be some restrictions to what you choose depending on the type of entity that you are choosing up top so be aware of that apply for an employer identification number the good old e i n uh there's a link to that here is also called a federal tax identification number now the e i n uh stands for employer identification number so you might think for example if i was a sole proprietorship up here with no employees i'm not doing payroll why do i need an e i n but you might still want one as a sole proprietorship because then uh if someone asks you for like a information for like a 1099 because they want a 1099 you or any or if you're discussing any jobs with another company it's unprofessional really often to give them your social security number it's also you know more of a security risk and so on so you might want an e i n it's pretty easy to set up you do not need to be a corporation or an s corporation or whatever or have employees to get an e i n you could be a sole proprietorship and it could be a useful thing to have so so be aware so most business need one of these numbers it's important for a business with an e i n to keep the business mailing address location and responsible party up to date irs regulations require e i n holders to report changes in the responsibility responsible party within 60 days they do this by completing form eight eight two two b change of address of responsible party and mailing it to the address on the form so you can change you know who's responsible for dealing with it dealing with the with the company matters in the e i n in other words if it's a sole proprietorship obviously it's straightforward but if you're a corporation s corporation or limited liability you might have multiple people that are in charge and because these are separate legal entities there's no one individual that obviously is in charge because they're basically managed they're managed companies for the owners or the shareholders right so now you got to label someone who's going to be in charge of kind of like the e i n and so on so have all employees complete these forms you got the form i nine employment eligibility verification u.s citizenship and immigration services there's a link to that here form w4 employees withholding allowance certificate pay business taxes the form of business determines what taxes must be paid and how to pay them so you got to pay your business taxes so proprietorship flows through to the individual as we saw here so you just got the schedule c you're just going to tack on the schedule c be aware that you do also not only have federal income taxes but self-employment taxes which is even more painful than if you worked as a w2 employee because they're kind of the employee and employer portion and that's comes as a shock to a lot of people and they get behind on their taxes when they move from a w2 employee to a a a sole proprietor so it's just like like like my cousin's five-year-old kid with her birthday coming up but it's an expensive birthday because you would think you only had to buy it like the bicycle but no there's like an added tax which is like the the tax for the self-employment tax it's even bigger than what you paid as a w2 any case if you're a corporation then the corporation is going to pay a separate tax that they're going to they're going to deal with and then you're going to have to pay taxes on the dividends possibly but it's more likely if you're small business you set up a next corporation or LLC which are also flow through entities ultimately taxed on your tax return although you do have to file another tax return and it'll flow through so it is quite bit more complex and costly on the management paying the tax professional to deal with all that kind of stuff so uh so in any case visit state websites so make sure and you also have the state taxes some states are jerks and they tax they tax you and call call them penalties just so they can pretend it's not a tax it's just just a service fee or whatever so make sure that you are aware of your state response bill perspective uh business owners should visit their state's website for info about state requirements there's a link to that here and there'll be a link to all this wonderful stuff in the description