I own a business that recently began to do really well; I am now earning real money! I never incorporated the business with the State of North Carolina. I am worried about sales taxes and I am concerned since I have never even mentioned my business income on my tax returns. I know I need to start doing some of these things, but every time I look into it, I get overwhelmed. I like working, not worrying about how I might be messing up legally. I know I should see a lawyer, but I do not even know what to ask, where to start, or when I do see one.” – Finally Making Money, Now What? in Matthews
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Dear Finally Making Money, Now What?
First of all, congratulations! Your hard work is paying off and now you are making money. And, now that you are making money, you get to spend some money becoming a more organized and sophisticated business entity. There are a few items you do need to address promptly with a lawyer and CPA. The following apply whether you are a new business or a growing business;
1. Depending on what your line of business is (manufacturing, retail, food, other services) will dictate what type of business entity is the best fit for you. The one that typically fits a small business best is a limited liability company. North Carolina’s Limited Liability Company Act enables owners to both limit their personal liability for actions of the business as well as claim special tax treatment, and it is easy to manage for a small company owner. However, depending on what you do, how you do it, business partners, and multiple other factors, another structure may be the best fit. Once you incorporate, you will apply for a Federal Tax Identification Number with the IRS. Typically, the attorney handling the incorporation will do this as part of the incorporation, but be sure to confirm this is being done.
2. Along with number one above, it is important to discuss whether you need a license or permit to engage in your line of business. The State of North Carolina does not issue a single business license, but your business may be required to have an occupational license. An occupational license allows a person “to work in a particular occupation after having met a minimum level of competency intended to ensure the health, safety, and welfare of the public.” This is different than “certification.” A “certification” is the official endorsement of a person’s qualifications by a regulator agency or professional organization such as a doctor or lawyer.
3. Next, get a referral to a qualified certified public accountant (CPA) from the lawyer. Make sure the CPA has experience in corporate taxes. When meeting with the CPA, make sure you discuss whether it is in your best interests to elect “Sub S Corporation” status with the IRS. Without getting too bogged down in the technicalities, this is a corporate form that meets specific IRS requirements allowing you to be taxed as a partnership instead of a corporation. Thereby, reducing your taxes. I also recommend you take your last several years’ worth of personal tax returns, information related to the income and expenses from your business as well as your notes from the meeting with your attorney. You will almost definitely need to amend your taxes since you stated above that you did not declare the business income in prior years on your personal taxes or file a corporate tax return. As agonizing as this process is, I can say it is far less agony than an IRS audit.
4. Finally, you mentioned sales taxes. This needs to be addressed with your lawyer to see if the business was required to pay them. If you do owe sales taxes, both the CPA and the attorney will work with you in order determine how much you need to pay and help you negotiate with the NC Department of Revenue, if necessary. If tangling with the IRS is not advisable, it is definitely not advisable to tangle with the NC Department of Revenue.
As overwhelming as this is, it is not impossible. The first step is making the appointment. After that, your lawyer will walk you through step by step and work in tandem with the CPA. Also, do not be afraid to ask questions. They are not dumb. They are why you are seeking legal advice in the first place!
Disclaimer: The information contained in this article is general in nature and not to be taken as legal advice, nor to establish an attorney-client relationship between the reader and Laura H. Budd or Weaver | Budd, Attorneys at Law.