When starting a business it is essential to be well informed about all the taxes you are going to deal with on regular basis. Even already successful companies sometimes face with difficulties and complications connected to business income taxes.

First of all you must decide what form of business entity you are establishing. Your form of business determines which income tax return form you have to file.

In the eyes of law there are five forms of business:

1. Sole Proprietorships: A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

2. Partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the company. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.

3. Corporations conduct business, realize net income or loss, pay taxes and distribute profits to shareholders in forming a corporation; prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a corporation is recognized as a separate taxpaying entity.

4. S Corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

5. Limited Liability Companies (LLC) are business structures allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

The federal government levies four basic types of business taxes: income tax, self-employment tax, taxes for employers, and excise taxes. Nearly every state levies a business or corporate income tax. Like federal taxes, your state tax requirement depends on the legal structure of your company. For example, if your firm is an LLC (Limited Liability Company), the LLC is taxed separate from the owners of the business, while sole proprietors report their personal and business income taxes using the same form used to report their business taxes.

There are three basic things you should define and study when it comes to business taxes classification:

1. There are many dependencies that determine when a new small company owner is liable for their first tax payment.

2. When filing your business income taxes, you must report all income – not just the income from the sale of goods, services, or property.

3. Because the IRS (Internal Revenue Service) doesn’t recognize “Limited Liability Company” as a federal tax classification, LLCs file tax returns as a corporation, partnership, or sole proprietorship. This guide explains classification election and other filing requirements for LLCs.

If you need more information about these taxes visit the U.S. Internal Revenue  Service’s official website.

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