Choosing how your business will be taxed

Every now and then a new client comes in the door with IRS letters because they went to an attorney to have their small business incorporated before they understood the process. What happened was that the client thought that the articles of incorporation was all there was to it, they saw their bill, and when the attorney offered additional services they said no and left. Professionals are not your teachers. They provide a service. If you plan to own and operate a corporation there is a presumption that you are aware of the matters involved. Kind of like driving a car, if you are behind the wheel, it is presumed that you know how to drive.

Filing articles of incorporation or articles of organization for an LLC is only the start. You will need an Employer Identification Number (EIN) and you need to file an IRS election as to how you choose to be taxed. Depending on your choice of entity classification there are other elections. Straightening out one of these messes will cost you about $750. To do it correctly the first time should cost about $300 assuming that your business is already incorporated or organized.

Do you notice that I am not telling you exactly how to do this? That’s because firstly, you are not aware of such matters (legalese for “You don’t know what you are doing”), and secondly, for a $300 business expense why take the chance? When you pay a licensed tax professional to do it for you there are years of understanding and experience that go into the process. So if you want to have an S corporation or an LLC go see a licensed professional, understand that the service is not free, and take heed of their advice. Otherwise you will be paying for damage control later.