When you first start your business, it may take a while to get up to speed and start having revenues come in the door. One challenge you will have in the first year is assessing whether and when you have to pay income taxes for the business. You may be responsible for filing tax returns for your business before you even start operations, depending on the legal structure of the company.
Setting Up a Business
There are several types of legal entities that you can set your business up in. It can be as simple as registering a business name or as complex as setting up a corporation with shareholders or a partnership with active and silent partners. Regardless of what type of business you start, you will be responsible for calculating and paying taxes on behalf of the business. Even if there is no activity in the company yet, there may be filing requirements that you must follow to avoid late filing penalties.
A sole proprietorship is the easiest form of business to set up. If you are running the business using your own name, you can just start operations. If you are using another name, you must register the name before starting business. The net income of the business is reported on Schedule C, which forms part of your personal tax return. The company's net income will be added to any other sources of income you have to be taxed at your marginal rate. You will also have to pay Social Security taxes on your net income. There is no need to file a Schedule C for a sole proprietorship before it has any income or expenses. However, if you have startup expenses, you can report them on your taxes, which may create a loss that you can claim against other sources of income.
Corporations and Partnerships
Corporations are separate legal "people." They file their own tax returns separately from yours. As the owner, you may be on the payroll and receive employment income from the company. You would report that on your taxes. A corporation is required to file an income tax return at the end of its first fiscal year regardless of whether there are revenues or expenses. There are several types of partnerships, some of which act like corporations and some like sole proprietorships. If the partnership income is split and flows through to the partners, you only need to report your share of the net income or loss if there is one.
Carrying Forward Losses
Many business have net losses in the first year of operation either because the revenues did not cover the expenses or because there are no revenues yet. In a corporation, there are no other sources of income to absorb the loss so it must be carried forward to be used in a future year. Operating losses in the startup year can be carried forward for up to 20 years, although you should aim for having taxable income before then.