It is entirely possible to put an idea together for a great new business, form a plan, and later open the doors (Real doors or virtual). As your business gets larger, government regulations get more complicated and some of these steps you may want to take sooner rather than later.
One thing is for sure: Anything involving the IRS is complicated and what’s worse, if you submit paperwork to the IRS that is completed incorrectly, it may cost you a large amount of money in penalties. For this reason, it may be advisable to gain the assistance of a professional, experienced person or company to assist with some of these steps.
Apply for an EIN Number (If needed)
An EIN number is your business identification number with the IRS. Often this number is also used for your state taxes. Not everybody needs an EIN but if you are a corporation, have full or part time employees, withhold income taxes, deal with firearms or tobacco, or you fall in to certain designations of business, you will need a number. The IRS website has detailed guidelines regarding this.
Declare a Business Structure
Your business structure is important because it dictates which type of income tax return you have to file. If you aren’t planning to use a business name other than your own name, you may operate as a sole proprietorship. Other designations will require filing paperwork with your secretary of state.
Set a Tax Year
A tax year is twelve consecutive months of business operation. The IRS requires that you declare a tax year by filing your first tax return and filing consistently using that reporting period. Your tax year can be the calendar year or a twelve month fiscal year.
Set Your Account Method
The IRS requires that you account for income constantly. The cash method of accounting requires that you report income and expenses as they happen. If you do a job for $500, you must report the $500 in the tax year when you got paid. If you received the check on December 31st, you must report it in that tax year. The accrual method allows you to report income and expenses as they acquired instead of when the money goes in or out. You can use either of these methods but you can’t switch back and forth.
Not all of these are required steps when you first start your business but they will be required as your business grows. Because these steps are free or low cost, it is advisable to complete these steps as the beginning stages of your business formation.