What Tax Concerns Need to Be Addressed When Starting a Business?

 Posted on June 05, 2025 in Taxation Law

Starting a new business can be exciting, but it can also be very complicated. Owners of small businesses and other types of companies will need to address a variety of complex financial and legal issues, including those related to federal and state taxes. From selecting a business structure to understanding state-specific tax obligations in California, there are several crucial steps that a new business owner must take. An experienced attorney can provide guidance in these situations, helping business owners meet their legal requirements and avoid costly mistakes.

Choosing a Business Structure

During the business formation process, an owner will need to determine how their business will be structured. The type of business entity will determine how the business will be taxed and how profits and losses will be reported, and it can also affect a business owner’s personal liability. Common structures include:

• Sole Proprietorship: With this type of business, there will be no separation between business assets and the owner’s personal assets, and business income will be reported on the owner’s personal tax return. While this type of structure is simple, it offers no liability protection.

• Partnership: This type of structure is similar to a sole proprietorship, but two or more partners will share ownership of the business. The business’s profits will be taxed on the partners’ personal tax returns.

• Limited Liability Company (LLC): Owners or partners can receive protection against liability through this type of structure. LLCs offer some flexibility in determining how a business will be taxed.

• Corporation (C-Corp or S-Corp): This type of business is its own legal entity. The type of corporation will determine how it will be taxed. C-corps may face double taxation, with corporate taxes being applied to a business’s income and owners or partners also being required to pay taxes on their earnings. S-corps are pass-through entities, and taxes will only apply to the earnings of owners or partners.

Choosing a Tax Year

A business’s tax year is the 12-month accounting period that will be used to track income and expenses and pay the applicable taxes. A new business may use the calendar year (January through December) as its tax year, or it may choose a fiscal year that ends in a month other than December. Using a fiscal year other than the calendar year may be beneficial depending on the nature of the business, and it may account for seasonal revenue patterns.

Applying for an Employer Identification Number (EIN)

An EIN or federal tax identification number is issued by the IRS, and it is used to identify a business for tax purposes. A business will typically need to apply for an EIN in order to open a bank account in the name of the entity as well as if it will be hiring employees or paying employment taxes or excise taxes. An EIN will also be required if a business will be structured as a partnership, LLC, or corporation.

Paying Income Taxes

Businesses are required to pay taxes on the income they earn. They will typically be required to make estimated tax payments to the IRS each quarter, and they must file an annual income tax return. A business owner may also be required to pay self-employment taxes.

Understanding Payroll Tax Responsibilities

If a business will have employees, it will be responsible for withholding and paying payroll taxes, including federal and state income taxes, Social Security and Medicare taxes, federal unemployment taxes, and California Unemployment Insurance (UI) and Employment Training Tax (ETT). A business will also need to make sure to file Forms I-9 and W-4 for all employees.

California Business Tax Obligations

Businesses operating in California will have a number of state tax requirements in addition to federal taxes. Applicable taxes may include:

• Franchise Tax: LLCs, S-corporations, limited partnerships, and limited liability partnerships (LLPs) and LPs doing business in California must pay an annual franchise tax. The minimum franchise tax is $800, and additional taxes may apply depending on the business’s income.

• Corporate Tax: An 8.84 percent tax rate generally applies to income earned by C-Corporations. Shareholders are also taxed on the income they earn through dividends.

• Sales and Use Tax: A retail business will be required to register with the California Department of Tax and Fee Administration (CDTFA), and it must collect and pay sales taxes on all sales of merchandise that are not exempt. Use taxes may apply to goods purchased in transactions that are not subject to state sales taxes. The specific taxes that must be paid will depend on the state tax rate and any local or district tax rates that may apply.

Contact a San Jose, CA Business Tax Attorney

Starting a business will require careful planning, and business owners will need to understand what taxes they will be required to pay and what forms will need to be filed with the IRS and the state of California. At John D. Teter Law Offices, our San Jose, CA tax lawyer can provide guidance on the steps to follow when starting a new business, ensuring that a business will remain compliant with federal and state tax laws. Call 408-866-1810 to schedule a consultation and get your business started on the right foot.