California start-ups can avoid common errors to keep IRS at bay

Anyone with a start-up in California needs to think about taxes from the very beginning and not after the company earns some revenue. Planning ahead can prevent issues with the IRS in the future and allow the company to take some deductions. That being said, there are several common errors that many entrepreneurs make that can create major problems later on.

Different legal entities have different tax liabilities, so any owner of a start-up should be aware of these before choosing whether to be a sole proprietor, partnership or corporation. Deciding on an entity is not a choice to make lightly, so business owners should weigh the pros and cons of each. Additionally, business owners should understand what their tax obligations are in terms of what makes the company fully tax compliant. In addition to state and federal taxes, this might include licensing fees, 1099s or payroll taxes.

Entrepreneurs also need to ensure that they are paying taxes quarterly, and it may be helpful to do so even if it is not legally required. They may also want to ensure that they are taking advantage of every possible business deduction. Expenses should be tracked throughout the year to make things easier at tax time.

Many entrepreneurs make the mistake of mixing their personal and business accounts, which can lead to confusion and possibly to a lawsuit and the payment of additional taxes. Opening corporate banking accounts and keeping corporate bookkeeping separate from personal is a fix for this problem. Start-ups may also wish to have an accounting program with a dual entry system that can expand as business needs grow.

Tax codes can be overwhelming and complex. Even the most careful business owners may find themselves facing tax compliance issues. If this happens, California entrepreneurs may wish to seek someone who is knowledgeable about all aspects of state and federal tax laws in order to resolve the issue with the IRS or state tax agencies.

Source: Upstart Business Journal, "Beware of the 7 common tax mistakes startups make," David Ehrenberg, Dec. 31, 2012

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