Questions to Ask a CPA When Starting a Business

Starting a new business involves many decisions, and navigating the complexities of finance, tax, and compliance can be challenging. Consulting with a Certified Public Accountant (CPA) from the outset provides guidance, helping to establish a strong financial foundation. A CPA can offer insights into business operations, ensuring adherence to regulations and optimizing strategies. This article explores key areas to discuss with a CPA.

Structuring Your Business for Tax Efficiency

The choice of business structure significantly impacts liability and tax obligations. A CPA can help evaluate options such as a Sole Proprietorship, Partnership, Limited Liability Company (LLC), S Corporation, or C Corporation, advising on the most suitable one based on specific business goals and tax situations. Each structure carries distinct characteristics and tax implications that warrant careful consideration.

A Sole Proprietorship is the simplest structure, where the business and owner are a single entity. Profits and losses are reported on the owner’s personal tax return, making it easy to form and control. However, this structure offers no personal liability protection, meaning the owner’s personal assets are not shielded from business debts or lawsuits.

A Partnership involves two or more individuals who agree to share in the profits or losses of a business. Like a sole proprietorship, a general partnership does not offer personal liability protection to its partners. For tax purposes, partnerships are considered “pass-through” entities, meaning profits and losses are passed through to the partners’ individual tax returns. Each partner receives a Schedule K-1 detailing their share of income, deductions, and credits, which they report on their personal Form 1040.

A Limited Liability Company (LLC) combines aspects of corporations and partnerships, offering owners protection from personal liability for business debts and actions. An LLC is treated as a pass-through entity for tax purposes, where profits and losses are reported on the owners’ personal tax returns. However, an LLC can elect to be taxed as an S Corporation or C Corporation, which can offer tax advantages, such as reducing self-employment taxes for owners.

An S Corporation is a special type of corporation that avoids the “double taxation” associated with C Corporations. Income, losses, deductions, and credits are passed through directly to the shareholders’ individual tax returns. This structure can result in tax savings, as the business does not pay federal income tax at the corporate level. S Corporations still provide limited liability protection to their shareholders, but they have specific limitations on the number and type of shareholders.

A C Corporation is a separate legal entity from its owners, offering strong personal liability protection. Unlike pass-through entities, a C Corporation pays income tax on its profits at the corporate level. If profits are then distributed to shareholders as dividends, those dividends are taxed again at the individual shareholder level, a concept known as “double taxation.” C Corporations can raise capital more easily by selling stock and have no restrictions on the number or type of shareholders.

Navigating Initial Tax Requirements

Setting up a new business involves several initial tax-related steps and registrations. Obtaining an Employer Identification Number (EIN) from the IRS is a requirement for most businesses. An EIN serves as a federal tax ID, much like a Social Security number for an individual, and is necessary for hiring employees, opening a business bank account, and filing federal taxes. The application for an EIN can be completed online through the IRS website, often resulting in immediate issuance.

Beyond the federal EIN, businesses need to secure state-specific tax identification numbers. These state tax IDs are unique identifiers assigned by state governments to track tax responsibilities within their jurisdiction. They are used for purposes such as filing state business taxes, withholding state income taxes from employee wages, and managing state unemployment taxes. The process for obtaining a state tax ID varies by state, but involves registering with the state’s tax department, often online.

For businesses selling tangible personal property or taxable services, obtaining a sales tax permit is necessary. This permit authorizes a business to collect sales tax from customers on behalf of the state. Requirements for sales tax permits vary significantly by state, and some states also have economic nexus rules that may require remote sellers to register. Applying for a sales tax permit requires providing business details, including the EIN, and estimated sales figures.

If a business plans to hire employees, it must register for employer withholding accounts at both the federal and state levels. Federal payroll tax obligations include withholding federal income tax, Social Security, and Medicare taxes from employee wages. State withholding accounts are needed for state income taxes and state unemployment taxes. These registrations ensure the business can properly remit withheld taxes and contribute to unemployment insurance programs.

Establishing Effective Financial Record Keeping

Establishing financial record-keeping systems from the start is important for both tax purposes and sound financial management. Accurate bookkeeping provides a clear picture of a business’s financial health and supports the information reported on tax returns. A well-organized system helps identify income sources, track deductible expenses, and monitor business progress.

Two primary accounting methods are cash basis and accrual basis.

Cash Basis Accounting

Cash basis accounting recognizes income when cash is received and expenses when cash is paid out. This method is simpler and provides an immediate view of cash flow, making it suitable for many small businesses.

Accrual Basis Accounting

Accrual basis accounting records income when it is earned and expenses when they are incurred, regardless of when cash changes hands. This method offers a more comprehensive view of a business’s financial performance by accounting for accounts receivable and accounts payable. While more complex, accrual accounting provides a more accurate long-term financial picture and is often required for businesses that carry inventory or meet certain revenue thresholds.

Regardless of the accounting method chosen, maintaining specific types of records is necessary. These records should be kept in an organized manner, either physically or electronically, to support tax filings and potential audits.

• Income records, including cash register tapes, receipt books, invoices, and bank deposit information.
• Expense records, such as receipts, invoices, and canceled checks for items like travel, meals, and utilities.
• Business asset records, including purchase price, depreciation, and sale details.
• Employment records, such as names, addresses, Social Security numbers, dates of employment, wages, and tax withholdings for all employees.

Understanding Ongoing Tax and Reporting Responsibilities

Once a business is established, it faces recurring tax and reporting obligations that require ongoing attention.

For many business owners, particularly sole proprietors and those with pass-through entities, estimated income tax payments are a requirement. The U.S. tax system operates on a pay-as-you-go model, meaning taxes are paid throughout the year as income is earned. Estimated federal income tax payments are due quarterly on April 15, June 15, September 15, and January 15 of the following year, with adjustments for weekends or holidays. State estimated tax payments also follow similar quarterly schedules. Failure to make timely and sufficient estimated payments can result in penalties.

Businesses with employees incur payroll tax obligations. These include Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, split between employer and employee contributions. Employers also pay Federal Unemployment Tax Act (FUTA) taxes, which contribute to federal unemployment programs. In addition to federal payroll taxes, businesses must comply with State Unemployment Tax Act (SUTA) taxes, which fund state-specific unemployment benefits, and state income tax withholding, if applicable.

These payroll taxes require quarterly filings, such as Form 941 for federal income tax withholding and FICA taxes, and an annual filing for FUTA taxes using Form 940. SUTA taxes are also due quarterly.

For businesses that collect sales tax, regular sales tax filings are mandatory. The frequency of these filings, whether monthly, quarterly, or annually, depends on the volume of sales and state requirements. Businesses must accurately report the sales tax collected and remit it to the appropriate state tax authorities by the specified deadlines. Even if no sales tax was collected during a filing period, a “zero” return may still be required.

Annual income tax return preparation for the business entity is an ongoing responsibility. The specific forms required depend on the business structure. These annual filings consolidate the financial activities of the business for the tax year and determine the final tax liability.

• Sole proprietors report business income and expenses on Schedule C (Form 1040) with their personal tax return.
• Partnerships file Form 1065.
• S Corporations file Form 1120-S, with individual partners and shareholders receiving Schedule K-1s to report their share of income on their personal returns.
• C Corporations file a separate corporate income tax return, Form 1120.