The corporate tax structure is highly complex and complicated. It is also not quite black and white. There are countless grey areas and if you are a startup founder or are even planning for a business venture, it is high time that you understand your taxes, and not just know about them
Just keep reading and by the time you finish, you will be armed with the appropriate knowledge about tax laws and the corporate tax structure.
Business incorporation is one of the decisions which will go a long way in affecting the tax structure of your business. A startup founder has three choices for incorporation – Limited Liability Company (LLC), S corporation, and C corporation. The S corporations and LLCs are taxed as partnerships. This means that all the profit generated or loss incurred finds its way to the share holders of such businesses. But the C corporation is under risk of being taxed the double amount. But with the ability to structure equity ownerships, the C corporation captures more interest of capital investors. However, the exit strategy of LLC and S corporation is more favorable because asset sales require more taxes to be paid than stock sales. But if you are interested in raising capital, C corporation should be your choice because S corporation has restrictions on the kind of stockholders which can be associated with it. Conversely, an LLC enjoys some attributions of both S and C corporations as there are no limitations on the types of stockholders.
Once your business is set up, the first thing you need to understand is that getting organized in maintaining accurate records is of paramount importance. You have to keep track of every tiny little expense that you make for your business. You have to track your miles, keep records of your receipts and any equipment that you purchase. The more accurate your records, the less trouble you will get into with the IRS. If you cannot manage and maintain your books by yourself, hire an accountant. Our team of professionals at Kenneth M. Perkins, Inc in South Boston, Virginia will gladly help you in setting up and managing the finances for your venture.
If you have formed an LLC, S or C corporation, you are responsible for tax and other required government filings which are due the next year. Some of the consequences of late filing of income tax are as follows:
It is required by all businesses to distribute Form 1099-MISC to any contractors that were paid $600 or more in the tax year. Its penalty is $100 fine per form or $250 per form if non-compliance was due to intentional disregard.
Annual Reports are due every year and late filing consequences are as follows:
These are only some of the penalties that have been listed for you to get an idea of the tax structure. It is a wise choice to find a professional tax preparer for your business. We have experienced accountants at Kenneth M. Perkins, Inc. in South Boston, Virginia who will help in setting up and growing your business.
Yes, there is a thing called employee misclassification – classification as independent contractors to save money on taxes. If you do exactly that and Uncle Sam finds out and views them as employees, you are in for some serious fines and penalties! Even if you do escape detection throughout the term of the employee, the IRS would get you once the contractor, after leaving the job, files for unemployment. This will be because the government will find no records for that person’s employment. So, however tempting this might sound, NEVER misclassify your employees.
Most of the time the startup founders don’t realize that employees, founders and advisors need to have their stock before the term sheet for an angel funding or venture. This is not explicitly stated in the law but it is crucial for you to understand. The best option for you is to find a tax preparer, that is best suited to your specific needs. We, at Kenneth M. Perkins, Inc in South Boston, Virginia work day and night to satisfy the needs of our valued customers.
The company shares need to be valued before the term sheet for a venture. Let’s suppose that a venture was started by three founders on 5th October. After five months of hard work, they get a $1.2 million deal which values their venture at $5 million. Most of the founders get those shares because of their hard work rather than paying for their shares.
When equity is paid by hard work then it’s called sweat equity. The payment for the hard work of a person is treated the same as ordinary income and the person is taxed when the income is received. In this case the income is shares. So, referring to the same example as above, each founder has shares worth $400, 000. All three invest the cash in the company which amounts to a total of $15, 000 in total. If the issuance of shares was documented in, say December, all is good for the founders because the value of the shares in March would be greater than in December. But if the shares were not documented, the IRS would likely think that the founders are getting $400,000 each and Uncle Sam would deem the $395,000 taxable.
This was just a basic guide for getting you to know your taxes if you are a part of the business industry. To get professional advice on how to manage your accounts and finances, contact us at Kenneth M. Perkins, Inc. 1016 Charles St, in South Boston, Virginia or give us a call at (434) 572- 1040.
Kenneth M Perkins CPA/PFS