No one likes to think about taxes. But as a startup you must consider them when you are making decisions about how to set up and run your company. When starting a business, there are some key tax issues to consider.
“Be aware of these issues and when you do engage an accountant or tax lawyer to help your business, make sure they are well versed on the tax implications of various decisions to your business.”ย
Here are some of the most common issues:
- Choice of Entity.ย There may be valid reasons to choose a flow through tax entity, such as an LLC or S corporation. Flow-through entities allow business losses to flow through to the shareholders to use on their individual tax return. But most venture capitalists and institutional investors prefer C corporations instead of flow-through entities
- Sales Tax.ย The company needs to collect sales tax on sales of its products, because failure to do so can have disastrous consequences. This issue is compounded if the company is selling in multiple states.
- Payroll Tax.ย Many cities and counties impose a payroll tax.
- Section 83(b).ย Founders and employees need to consider whether they can mitigate potential tax issues by an IRC Section 83(b) election. A Section 83(b) election relates to when someone receives stock or options subject to vesting and can minimize deemed taxable income to the recipient.
- Stock Option Issues.ย Companies often grant stock options to employees. If not done in compliance with IRS guidelines, such grants can result in adverse tax consequences to the company and/or the employee.
- Qualified Stock Business Stock.ย Holders of stock in qualified small business corporations may be entitled to a reduced rate of tax on gain from the sale of โqualified small business stockโ under IRC ยง 1202.
- Tax Incentives.ย Depending on the nature of the business, various tax incentives may be available, such as renewable energy tax credits and investment tax credits.
Be aware of these issues and when you do engage an accountant or tax lawyer to help your business, make sure they are well versed on the tax implications of various decisions to your business.
