For first-time small business owners, the thrill of setting up shop often revolves around the tangible aspects of their enterprise: how much inventory to buy, logistics, establishing business banking, and securing the right name. Yet, amongst these foundational decisions, many overlook a crucial component of business ownership: tax obligations. With recent Census data revealing a record-breaking 5.5 million new business applications in 2023–marking the most robust year for new ventures on record and the third consecutive year of historic small business growth–the spotlight on financial diligence has never been brighter. As these new business owners navigate their first year, they must remember that for certain entities, filing taxes is mandatory, regardless of their profit margins. Here are some insights that may come as a surprise to many first-timers.
The Misconception of “No Income, No Filing”
Even if your new business didn’t earn a single dollar in income, you may still be required to file a return. This rule catches many first-time entrepreneurs off guard, but it’s a crucial piece of compliance you can’t afford to overlook. Whether you’re operating as an LLC, a C Corp, or an S Corp, the IRS expects to see your financial activities on record. This isn’t just bureaucratic red tape. Submitting your tax filings, even in the absence of income, serves as an official acknowledgment of your business’s operational status. It’s like keeping a detailed diary of your startup’s financial journey, which, in turn, can unlock potential tax credits and deductions down the line.
Beyond just proving your business’s existence, these early tax filings lay the groundwork for a transparent relationship with tax authorities. They can help establish your credibility and financial integrity right from the start, which will be invaluable as your business grows and seeks further investment or loans. It allows you to document and carry forward losses that could offset future profits—a strategic move many new business owners miss.
Foundation for Growth
It’s a common pitfall: many business owners delay seeking legal and tax advice side by side until their operations have scaled significantly. By then, they often discover that their initial, perhaps makeshift, systems and structures are ill-equipped to support their growth. This oversight can weave a complex, costly web of issues that are challenging to resolve. For instance, an entrepreneur who initially sets up their business as a sole proprietorship to save on costs may later find that transitioning to a corporation for better tax benefits and liability protection is not only complicated but also riddled with potential legal and tax penalties. Similarly, businesses that expand without proper contracts or fail to protect their intellectual property early on may face disputes or infringement issues that hinder growth and require expensive legal interventions. Laying a solid legal and tax foundation right from the start can save time and money once expansion begins.
Legal and tax advice are not one-size-fits-all and many issues will not be obvious at the start. There are layers of considerations that must be evaluated at every stage of growth. From the tax implications of your business structure to the nuances of employment law as you start to hire, every decision has a ripple effect on your company’s future. That’s why it’s critical to ask questions and share planned changes with your advisors, even those you might think the questions are too basic or details immaterial.
Engaging with professionals early on doesn’t just help you build a stronger foundation—it empowers you with the insight to navigate growth strategically, avoiding common pitfalls that can stall or even derail your progress. Remember, in business, being proactive is always better than being reactive.
Married Taxpayers and Business Ownership
Stepping into the business world with your spouse, especially through avenues like jointly owned rental properties or LLCs, introduces a layer of complexity to your tax situation that many don’t anticipate. A common misconception is that marital unity simplifies business operations and tax obligations. However, the reality is quite the contrary. When you and your spouse own a business together, the IRS views your business as a partnership, irrespective of your marital bond. This distinction mandates the filing of a separate partnership income tax return, a requirement that often catches couples off guard.
This oversight is not just a mere procedural hiccup; it has significant implications for your tax planning and financial management. Many couples venture into business assuming that their combined personal tax returns will cover their business activities. This misunderstanding can lead to missed opportunities for tax deductions, incorrect filings, and, potentially, heightened scrutiny from tax authorities. Professional tax advice partnered with legal insights becomes invaluable in these situations, guiding you through the complexities of partnership tax returns, optimizing your tax benefits, and ensuring compliance.
Conclusion
Launching and running a new business in today’s market demands more than just an entrepreneurial spirit and a solid business plan; it requires a keen understanding of the tax implications that accompany the thrill of entrepreneurship. In this context, the common narrative that tax considerations are secondary to business operations is not just outdated; it’s potentially detrimental to the longevity and success of your venture. Whether it’s the unexpected requirement to file taxes without income, the strategic foresight needed to lay a solid foundation for growth, or the intricate tax considerations for married entrepreneurs, these aspects underscore the multifaceted nature of running a business. It becomes about peeling back the layers to reveal the complexities beneath, challenging the notion that tax planning is a concern only for the financially buoyant or the overly cautious, when in reality, it’s for everyone from all walks of life.
Author
Klaralee Charlton is an estate and tax partner at 3i Law working with clients to effectively plan for the future transfer of assets and efficiently administer assets post-death. She works with clients to visualize their estate planning goals while capturing opportunities to mitigate risk, administrative burdens and unnecessary tax liability. After a death, Klaralee works alongside family members to accomplish necessary transfers and ensure reporting obligations are met. Klaralee also partners with legal and accounting professionals on case strategies to minimize tax liability and meet reporting requirements.
She is a frequent speaker on the topics of estate and fiduciary income tax and is an adjunct professor in the University of Denver, Graduate Tax Program.