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Congratulations! You are starting your home business and are eager to find out as much as you can about how to get started. This series can help you with the recordkeeping and taxes associated with your new venture.
The income taxes you pay are based on your net profit. This profit is determined by totaling your gross profit (actual money received) and reducing it by your expenses (all cash /check deductions). The more deductions you have, the lower your net profit, the lower your income tax liability becomes.
Once you decide you want to open a business, you need to determine your legal organization. The most common choice is a sole proprietorship since it is the easiest to establish and maintain. IRS Publication 583 defines a sole proprietorship as the simplest form of business organization. "The business has no existence apart from you, the owner. Its liabilities are your personal liabilities and you undertake the risks of the business for all assets owned, whether used in the business or personally owned." This means that you are ultimately responsible and liable for any business debt and your personal assets can be used to cover a business debt. This unlimited liability is the greatest negative aspect associated with this form of business organization.
As a small business owner, you may want to do some research into the other legal entities such as a Limited Liability Corporation or an S Corporation. Both of these entities provide limited liability which allows you to separate from your business. Thus your personal assets can realize some protection in the event of a business debt or lawsuit. Each option has its own income tax ramifications, so you may want to do some research before you decide. There are some IRS publications which can assist you with this decision. You can order Publication 334, 541, 542, and 589 by calling the IRS at 1-800-829-3676.
Brigitte A. Thompson is an accountant, former daycare provider and work at home mom of three. She is the President of DATAMASTER, LLC, an accounting firm based in Vermont. Her book, The Home Daycare Complete Recordkeeping System, is used throughout the United States as a reference guide and training manual. She has been producing it since 1995 and updates it annually.For more information, please visit her web site at DaycareRecordkeeping.com.
Disclaimer
All information is based on the current federal tax laws of the United States.
Since these laws are subject to change, neither the author (Brigitte A. Thompson)
nor this web site (www.MomsBudget.com) assume liability for modifications
to the law which occur after the creation of this work. Every effort has been
made to ensure this information is as accurate and complete as possible. These
articles contain general information for businesses and are offered as an
overview of the law.
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