Starting a business is one thing, but running a business is a whole different animal. An animal that loves paperwork and charging interest on back taxes.
Read on to track some of the requirements your small business must fulfill each year.
Oh come on. It’s three points. OK, fine—pay your taxes, renew your business licenses/permits, and file a statement of information. Let your accountant and lawyers [us] do the heavy lifting. 🏋️
1. Pay Your Taxes
You should follow your accountant’s advice when it comes to taxes. Below, we give you the heads up regarding some common categories of taxes at the federal, state, and local level. This information greatly varies from state-to-state and depends on the structure of your business entity and its owners/members/shareholders.
Federal Income Taxes
- Corporations are taxed as a separate legal entity, and thus must file and pay income taxes on their own tax return.
- LLCs with only one member must report business losses and profits on Schedule C, to be submitted with the member’s individual tax return.
- LLCs with two or more members must file an annual informational return with the IRS. The LLC reports its profits and losses on Form 1065. The LLC must also submit a Schedule K-1, which is used to inform the IRS of the members’ chosen profit division. Members will use the information from Schedule K to report business income or losses on their individual federal income tax returns (Form 1040) using Schedule E. Since the LLC already filed a Schedule-K, members do not need to submit this form with their returns.
Federal Self-Employment Taxes
- Most businesses must contribute to Social Security and Medicare through federal self-employment taxes, which are around 15 percent. Certain tax filings, however, can avoid self-employment tax, so, again, time to check with your trusted CPA.
Annual State Franchise Tax—$800 in California (2016)
- LLCs and corporations must pay an annual franchise tax.
- LLCs owe the tax in their first operating year, whereas corporations are given a one-year grace period.
State Income Tax
- LLCs: Most states collect income tax from LLC members on their share of business profits. For a single-member LLC, business profits will be taxed on the sole member’s individual state income tax return. LLCs with two or members are typically taxed as partnerships and must file tax returns as owners of partnerships in the state.
- S Corporations: In most states, S Corporations are taxed like the LLC (see above). For more information on the S Corp election, read our article here.
- C Corporations: Corporations face double taxation. The corporation itself must file and pay income taxes on its own tax return. Shareholders/owners must also pay taxes on dividends received (not salaries) at their individual tax rate as part of personal income. (This is a taxation scheme more common for large corporations with passive investors).
State Sales Tax (if applicable)
- Retail businesses must pay a state sales tax on their retail sales—usually paid to your state tax agency and often filed with your state tax return.
- Typically, the state tax agency then distributes collected taxes owed to the county or district throughout the state.
City and County Taxes
- Cities and counties vary on how they tax businesses within the locality—but your business can always expect to face some sort of business tax, which may include property tax.
- After you obtain your local tax certificate (Step 6 in our article 10 Steps to Form Your Business), your local tax authority will know about your business and charge these taxes. As such, most businesses automatically receive tax-filing information soon after they register.
- Typically, your local authority will tax you based on your business’s attributes such as whether you’re a retail sales business, a recreation and entertainment business, or a professional service business. For instance, all retail sales businesses in Oakland must pay $1.30 per $1,000 of gross receipts, while all entertainment businesses pay $4.50 per $1,000. Service professionals are sometimes taxed based on the number of years they have been licensed in the state.
- If applicable, check whether any property taxes apply in your area and how to go about paying them.
2. Renew Business Licenses and Permits
- Typically, business permits and licenses must be renewed once a year. Most state agencies will send you a renewal reminder in the mail.
3. File a Statement of Information (SOI)
- Corporations must file an SOI each year: Form SI-550 when any information has changed since the last complete SOI was filed; or Form SI-550 NC if within the applicable filing period, and a fully completed SOI must have been filed in the past.
- LLCs must file an updated SOI every two years. Form LLC-12
- All companies must file the SOI as required, regardless of whether the company did business that year and regardless if no information changed from their previous SOI.
💥 Bonus Requirement: Board Governance (Corporations Only) 💥
Annual Meeting Minutes
- Annual Shareholders Meeting: Shareholders must meet each year, typically to elect new directors and discuss any other business. During the meeting, the Secretary records the meeting minutes and files them within the corporation’s record book.
- Annual Directors Meeting: Directors must also meet each year, typically to elect officers and approve other matters. The Secretary must also keep meeting minutes and file these within the Corporation’s record book.
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While this may seem like a lot to keep track of, remember that your accountant will typically handle your business’ tax filings and we’re available to walk you through the rest.
The end of each year is a good time to fulfill these housekeeping matters and ensure your business is on track to operate smoothly in the coming year.
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Photo credit: Phillip Harder