The rise in small business ownership has soared in the last several years. Out of all these business structure options, none are as popular as a Limited Liability Company (LLC). Yet, despite the popularity, some business owners are still unsure if an LLC is the right business structure for them.
You could always consult a tax professional and get their opinion, but as a business owner, it is always good to have a basic understanding of what you’re dealing with. This is especially important when it comes to your LLC tax prep because tax time is where a lot of business owners tend to make mistakes in tax planning as they falter about what they should do.
Mistakes You Should Avoid in Tax Planning
Now, let’s take a look at some of the common mistakes you should avoid in tax planning so you are better prepared to run your business:
1Understanding the Type of Forms You Need to Use
As a new business owner, the tax forms that apply to you are something that is worth looking into. Invest the time and energy needed to educate yourself on the type of tax forms that apply to your business because you will be glad that you did down the road.
Understanding the business forms you need is one aspect, the second aspect is to work with a tax accountant or firm that specifically niches in your industry type. If you do this, then your accountant is going to take the time to sit down and explain to you in even greater detail what the forms are and what you should know about them because this is what they do. They specialize in handling taxes for small business owners in your specific industry.
A lot of new business owners find out the hard way after being in business for a year what type of forms they need and you could easily avoid becoming one of these businesses. For example, if you are a single member LLC, then one of the forms that would apply to you is Schedule C. This is one of the easiest forms that a taxpayer can use to fill out their income and expenses. If you have a multi-member LLC, then the form you would need is Form 1065.
You would also have to file a K-1 Form. LLC owners would also have a SS-4 Form. This is the form that will allow you to apply for your EIN number. Your EIN number is your Employer Identification Number. Think of your EIN number as if it were a social security number for your business. The SS-4 form must be applied and completed accordingly for any new business that is set up as an LLC.
Yes, there are a lot of forms to familiarize yourself with and luckily, you have a whole year before tax season to get familiar with these forms and learn as much as you can before you file.
2You Need to Know Your Income Type
Before you set out to establish your LLC, you should know the type of income you are earning. There are three types of income categories that a business owner could potentially fall into.
The income bracket that you fall into will determine if you need an LLC or some other type of business structure like a C Corporation or an S Corporation. The first type of income category is called the Ordinary Income. This is the everyday W-2 income that you work hard for. Your 1099 compensation would also fall under this category. The second type of income category is called the Passive Income.
Technically, any income you earn that you don’t have to work for is categorized as passive income. Some examples of this type of income include investment properties or interests that you earn. The third category of income is called the Portfolio Income. You earn this kind of income from capital gains or the sale of capital assets.
These three income categories will help you decide if you should register your small business under the LLC structure.
3Use Your EIN Number for Income and Expenses
When you set up an LLC, this number should be used for your income and expenses. Use this nine digit number to your advantage because it is going to help you out during tax season. Open a business bank account using your EIN number.
This way, you can avoid using your personal credit and separate your personal expenses from your business expenses. When it’s tax time, it is going to be much easier for you and your accountant to sit down and go through all your business income and expenses provided you document every expense through your business account and your EIN number.
Some new LLC owners in the past have made the mistake of setting up an LLC but then never using an EIN number. Come tax time, they realize that there are a lot of things they end up not qualifying for because they never made use of their EIN number for their income and expenses.
If you have a registered LLC and an EIN number already that you haven’t made use of, go set up a business account today and start tracking all your business income and expenses through that account.
4You Need to Know How to Reimburse Yourself
If you own an LLC, it is important that you know how to reimburse yourself. This is one of the mistakes that a lot of new business owners are guilty of. They don’t know how much they should be reimbursing themselves for their business expenses.
This is one example of why it is important to have a separate business account for all your business expenses. Without a separate dedicated business account, you could find yourself paying for a lot of business items out of your own pocket when they really should be categorized as business expenditure.
Hopefully, these tax planning tips will help you steer clear of some of the many mistakes new small business owners make. Becoming a savvy business owner is much easier than it looks. All it takes is the willingness to spend time studying and learning about all the different aspects of owning and operating your LLC.