Tax Topics for 2018 Small Business Week – Getting Started

The 2018 Small Business Week started April 29, 2018 and runs through May 5, 2018. This is an annual event hosted by the U.S. Small Business Administration. The SBA provides resources year-round for all small businesses and this week is the celebration of the contributions by entrepreneurs and small business owners.

I wanted to take this opportunity to share some tax information for people thinking about starting their own small business. While this list is not all-encompassing, it should give you a good idea of things to consider when you start your business.

How will you be taxed?

Picture of Schedule C for 2017
IRS Schedule C for 2017

One of the first things I talk with clients about is how they want their business to be taxed. I know it’s not that exciting to start off a conversation about taxes before you actually start the business, but this can have big consequences for you later on down the road. The easiest way to tax the business is to include it on your personal Form 1040. To do this, most businesses will be reported on Schedule C. There are some other forms that might be used like Schedule E to report rental activity or Schedule F to report farming activity. These activities will be taxed at your ordinary income tax rate and will most likely be subject to self-employment taxes.

LLC Formation Document
Texas Certificate of Formation for a Limited Liability Corporation

If you are going to use a separate legal entity, you’ll have some options on how to have the entity taxed. The most common entity type that I see is a limited liability corporation, commonly called a LLC. If you are the only owner of the LLC, it is treated as a disregarded entity by default. In this case, you’ll put it on your personal Form 1040 just like in the paragraph above. You can also elect to treat the LLC as a “regular” corporation or an S-Corporation. A regular corporation is reported on Form 1120 and an S-Corporation is reported on Form 1120-S. There are different reasons to choose one of these options, but in my experience, the most common election is to treat the entity as an S-Corporation. Being a regular corporation or an S-Corporation will require you to file a separate tax return for the entity and this means you’ll need to budget for have this extra tax return prepared for you.

Are you starting a business with someone else?

If you are starting your business with someone else, you have different options than just going solo. First off, you’re going to want to get an agreement in writing about how the business will operate. This is really important and I recommend that you include the way you want your entity taxed to be included in these documents. The common types of legal entities are partnerships, LLCs , and corporations. I highly recommend you have a discussion with your tax pro and your attorney to discuss the tax and legal difference between these entities.

Every business and entrepreneur will have different needs and requirements at this beginning stage so it is important to get professional help. This will give your new business a strong foundation on which to get started.