If you own a small business, you know how much work it is to keep this endeavor operating smoothly. From completing daily projects to supporting the longevity of your business, your plate may seem as if it is always full (and that there is always another item on your “to-do” list). When it comes to business tax matters, it’s understandable to approach these topics with a bit of uncertainty and anxiety. Many small business owners do not have an extensive background in accounting or taxation issues, which can leave them vulnerable to oversights or errors that can quickly escalate into costly mistakes. Whether you have been running your business for a long time or you are just beginning to entertain the idea of transforming your business idea into a reality, it’s worth enlisting the guidance of an experienced and knowledgeable business law attorney who understands the nuances and complexities of business taxes and their implications. As you set your business up for success, it’s essential that you take the time to recognize some of the most common small business tax mistakes people make and how you can avoid them. With a trusted and caring business attorney by your side, you can make decisions with greater certainty and confidence. Let’s take a look at some of the most frequent tax-related mistakes that small business owners make and how you can protect yourself and your business from these costly errors.
Mistake #1: Selecting an Overly Complex Business Entity
When you start a business, you need to choose an entity structure that aligns with your needs and vision. For instance, you may decide to structure your business as a sole proprietorship or as a limited liability company (LLC), depending on your preferences and goals. Unfortunately, when someone rushes into selecting an entity structure that is overly complicated (such as an S-corporation or other complex formation), the tax implications can be overwhelming and nearly impossible to navigate without the expertise of a business taxation professional. Before you rush into choosing a business entity for your new endeavor, consider discussing the potential benefits and limitations of each option with a highly qualified and experienced business attorney so that you can make an informed decision with greater confidence and certainty.
Mistake #2: Not Understanding Self-Employment Taxes
Just as it’s important to avoid choosing an entity structure that is too complicated for your business needs, it’s equally critical that you understand the implications of selecting a simple entity structure. For example, setting up a sole proprietorship may suit your business needs early on. However, it’s key to recognize that a sole proprietorship means that the owner is subject to self-employment taxes, which can come as an unpleasant surprise to those who have not planned accordingly. As you explore your entity structure options with your business law attorney, it’s best to think through liability and tax implications so that you are ready to comply with all tax obligations when the time comes.
Mistake #3: Neglecting to Keep Track of Taxable Income
As a small business owner, it’s important to recognize that a rise in profits will also mean a higher tax bill. Unfortunately, many businesses find themselves blindsided by a massive tax bill by the end of the year, as they have not tracked their cash flow consistently over the course of the year. In some cases, the tax amount is so surprising that the small business does not have the funds to pay the tax bill when the time comes. You can avoid these unpleasant surprises by maintaining an up-to-date profit and loss statement and setting funds aside to cover the taxes when the year ends.
Mistake #4: Forgetting About Tax Deductions
Small business owners are entitled to take certain deductions when the costs are associated with the operation of their business. Mileage, computer programs, and other expenses that are vital to the running of your business can be claimed as tax deductible expenses, so it’s essential that you keep track of these costs. You can keep a written record of these expenses or use a phone or computer application to track these expenditures. Depending on the entity structure you select for your business, these expenses may be tax deductible for your company or be reimbursed to your personal account from your business operations. It’s best to discuss the specifics of these matters with your knowledgeable small business attorney to minimize any potential issues and ensure that your business continues to operate smoothly.
Mistake #5: Making Critical Decisions Without Legal Guidance
Although you can make business decisions without legal representation, it’s highly recommended that you seek the guidance of an experienced business attorney before you move forward with any major decisions that could carry lasting consequences. Online guides may appear to provide you with enough information to make a business decision, but these resources are often too generic and vague to provide sufficient protection for small business owners. Your business deserves the best, which is why it’s important to enlist the help of a dedicated and experienced business lawyer who can assess the details of your business and identify the most strategic options to support your vision and goals. The last thing you want to face as a small business owner is navigating a preventable legal dispute. Now is the time to put the necessary legal protections in place to minimize the potential for costly legal or tax consequences arising down the road. If you are ready to learn more about the strong and effective legal strategies that may be available to you and your small business, reach out to a highly experienced and caring business law attorney today to get started.
At Judex Law, LLC, we believe that small businesses deserve the care and breadth of knowledge that’s typically reserved for larger companies with in-house legal counsel. We are committed to providing our business clients with the effective and innovative legal solutions they need in order to grow and thrive. If you want to learn more about forming or growing your small business, call our Colorado office today at (303) 523-4022 to get started with a dedicated and friendly business law attorney.
