For people who start, run, or work in a small business taxes play a big role in your day to day life. It can be one of the biggest expenses a company faces.
The tips we've highlighted are based on Author Jane Barratt's Lynda.com video series entitled Taxes for Small Business
In the following, we'll look at what's important for small business owners and managers to understand about tax. As always, we suggest following up with your accountant if you have any questions about taxes. We'll take a look at how tax policies and practices will affect your business. How different business structures will affect what taxes you'll be subject to, as well as the big picture of strategies to minimize your tax burden.
Also see Part 1 of this series for more on understanding tax policy.
Setting up a business:
When you form a business, you have to choose a legal structure.
Will you be an owner-operator or sole proprietor, a partnership, a limited liability company, or a corporation? There's lots of options, and even more tricky, they vary by country. Make your decision based on these three factors. First,
1: Consider Legal Issues
Will you as the owner, be legally responsible or do you want a hard line between you and the business for legal responsibility?
2: Ownership and funding
Generally, if you want to have multiple owners or shareholders, you should be registered as a corporation. The same applies to startups who are looking to raise money through fundraising, as corporations are much more flexible for this purpose.
Finally, choose a legal structure based on tax issues. Are you going to benefit from being a pass-through company where you pay tax once, or a corporation where there's double tax? And what tax rates are you likely to be paying in each? The hard part is that there are no future facts. You can't know how your business is going to do.
So, where do you start to make sure you're set up right from a tax perspective? Here's a good shortcut. Look into businesses similar to your own and check out the small print on their websites to find their legal name. Then look up that name with the tax bureau in your area to find out what legal structure they use.
Charities and not-for-profits are pretty clear. They're generally tax exempt but still need to qualify for the tax exempt status and file an informational tax return.
In sole proprietorships, partnerships, and limited liability companies, the revenue is considered pass through to their owner and the tax burden lies at the individual level.
The downside of partnerships and sole proprietorships is that the owners bear a significant legal burden. Basically, their finances and the company finances are considered intertwined, so if they make a product that makes people sick, they can be personally liable when the company is sued, and their personal assets could be seized.
Business Location for setup:
Where your business is registered can be a very strategic decision. Businesses of all sizes are subject to taxes and levies in addition to federal, state, local, sales and value added taxes. You could be paying indirect levies like unemployment insurance or medical fees and it's not just an issue for the business.
If you're considering where to set up a business, individual income tax rates and property taxes matter too, as you and your team will be subject to those taxes. It's worth exploring whether you can register a business in a place other than where you live or physically do business. If you're planning on setting up a business in the US, a great place to start is taxfoundation.org. This site publishes an index every year of best to worst states for taxes.
Other countries have equivalent lists so spend some time searching for independent assessments.
- Check out the Canadian Federation of Independent Business (CFIB).
Beyond tax, different places may have lower costs and easier processes to set up businesses plus lower burdens on annual filings and more favorable legal systems where there are business specific courts. Do you wonder why all of Apple's European revenue comes from Ireland? That's because the tax rate in Ireland is super low. So their Irish office earns all of the Apple intellectual property for Europe so it can claim all of the revenue for Europe.
Also know that if your legal location and your physical location are different, you probably need to register your business in the location it operates in.
Until you register as a foreign corporation, you will probably not be legally permitted to operate, sell products or collect sales taxes. Remember, things can change and don't rule out moving your business in the future should it make sense financially or logistically.
Thanks for reading!
For more resources visit: Sage Product Support Resources for help with products in North America