How to Start a Business and Keep the IRS Happy

By Logan Sossman Esq.

Starting a new business can be a daunting endeavor, but it doesn’t have to be. Like most things in life, if you take it one step at a time, it becomes less formidable and more doable. This article will cover the basics of starting a new business. Yes, there is much more to consider, and yes you’ll still have to consult a Tax Professional. Once you do these initial steps, however, you will be one (big) step closer to realizing your dream – and keeping the IRS and the Feds happy.

1. Get an Employee Identification Number (EIN)

Also known as a Federal Tax Identification Number, the EIN is used to identify a business entity. So, as you can assume, it’s rather essential. Note, however, that not every business may require an EIN from the start. To figure out if you need to apply for an EIN, check out this useful self-assessment quiz and see.

Registering for a federal EIN is relatively painless and free. You can apply online here. If you are a Herndon, Reston, or any Virginia Business, you will also have to apply for a Virginia ID number in most instances and, depending on what your company may have to offer, specific licensing may be required (i.d. real estate, engineering, etc.) To figure out the necessary state requirements for Virginia check out this useful site.

2. Select a Business Structure

What business entity is right for you? Well, that is a subject onto itself, but when speaking of business structures, there are five to consider: Sole Proprietorships, Partnerships, Corporations, S Corporations and Limited Liability Companies (LLC.) Each has different things to consider but greatly impact how your entity is taxed and your liability.

For more information about these various business entities, the IRS has a good general summary you can check out. Remember, how you structure your start-up now can have a tremendous impact in the future, this resource should help you make the right decision.

3. Choose a Tax Year

You can’t escape taxes…well, you can, but the alternative, death or prison, is much less desirable. So, you must define a tax year for your company. A “tax year” is an annual accounting period for keeping records and reporting income and expenses.

When it comes to tax years, you designate a Calendar Year or a Fiscal Year. A Calendar Year is exactly what you think it is – 12 consecutive months beginning January 1 and ending December 31. This is what most small businesses designate as their tax year. A Fiscal Year can be 12 consecutive months ending on the last day of any month except December. So, it can be May 1 to April 30, June 1 to May 31 or any such 12-month increment.

In most instances, you adopt a tax year by filing your first income tax return using that tax year.

Generally, anyone can adopt the calendar year. However, if any of the following apply, you must adopt the calendar year.

  • You keep no books or records;
  • You have no annual accounting period;
  • Your present tax year does not qualify as a fiscal year; or
  • You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.

4. Don’t Forget Employee Tax forms

If you have even one employee – you have to have them fill out Form I-9 (PDF) and Form W-4. It’s so easy to forget, but so important to do.

5. Pay Your Business Taxes

Nothing derails a business faster than running afoul of the IRS. All businesses, except Partnerships, must file an annual tax return. The form you use depends on your business structure (see 2 above.)

In addition to Income Tax, there are other types of business taxes to consider that may or may not be applicable. They include Estimated Taxes, Self-Employment Tax, Employment Taxes, and Excise Tax. Still confused? Me too – so check out this IRS summary on business taxes.

Of course, there is so much more that you need to consider when starting a business. The points above are simply the basic steps you need to do to keep in the graces of the IRS. Fortunately, there are a plethora of sites that can help with the nuts and bolts of starting a business. Here are just a few resource links to help you get started:

For Virginia business specific information click here.

The U.S. Small Business Administration is a very useful site and has a good, general 10 step guide to starting a new business.

The Entrepreneur Magazine has a 12 step guide to starting a new business by Matthew McCreary that covers the topic from the idea stage to actualization.

If you don’t mind the adds and business plugs, the FindLaw site has a pretty exhaustive start-up checklist that goes into some detail that’s worth a read.

Business ideas are just wishful thoughts unless you can make it happen. Get to it!

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