Starting a new business takes courage, energy, and a willingness to take risks. Alongside the excitement, though, comes a reality that can't be ignored: taxes. How you set up your business, track expenses, and plan for profits makes a big difference in how smoothly you grow. A little planning today can prevent costly mistakes tomorrow.
Entity Selection: LLC, S-Corp, or C-Corp?
Choosing a legal business structure is one of the first tax decisions you'll face. An LLC offers flexibility and is often the default for new entrepreneurs. A C-Corp provides easier access to investors but creates double taxation at the corporate and shareholder level. An S-Corp avoids that double tax, but owners who work in the business must pay themselves a reasonable salary before taking distributions.
Each structure affects how you're taxed, how you take money out of the business, and how you plan for growth. The right choice depends on your industry, expected profits, and long-term goals, which is why guidance from a CPA when selecting your business entity is essential before locking in a decision.
Planning for Early Losses and Profits
It's common for startups to run at a loss in the first few years. Those losses don't have to be wasted. With proper elections, you may be able to carry them forward and use them to offset future taxable income. Startup and organizational costs, such as professional fees or equipment, may be deducted immediately up to certain limits, with the rest amortized over several years.
Planning ahead also means looking at how you'll handle profits when they do arrive. New owners often forget about quarterly estimated taxes, which can lead to penalties if ignored. Having a plan for both losses and profits keeps your cash flow predictable and your tax obligations under control.
Unlocking the Value of R&D Credits
Research and development isn't just for large tech companies. If you're creating new products, improving processes, or experimenting with new methods, you may qualify for valuable R&D credits. These credits can reduce your income tax bill, and for many startups, they can even offset payroll taxes.
A recent law change under OBBBA allows businesses to fully expense certain domestic research expenditures, which provides even more immediate relief. Capturing these benefits requires good records and clear documentation, which is where working with a CPA pays off.
Key Moves to Make in Your First Years
- Choose an entity structure with future growth in mind.
- Track and categorize startup costs carefully.
- Capture and document research expenses early.
- Plan for estimated taxes to avoid surprises.
- Review compensation approach if electing S-Corp status.
FAQs
Do I have to pick the "right" entity right away?
Not always. LLCs offer flexibility, and you may be able to elect S-Corp status later. Planning early helps avoid restructuring headaches.
Are losses wasted if my business isn't profitable at first?
No. Losses may carry forward under current rules, reducing future taxable income.
Do R&D credits apply if I'm not a tech company?
Yes. Qualified research spans many industries, from manufacturing to design, but careful documentation is required.
Lay the Groundwork for Long-Term Growth
Starting a business is about following your passion and chasing your dreams, but it’s also about building something sustainable. Tax planning might not be glamorous, but it protects your cash, smooths your growth, and helps you avoid surprises.
At Myrick CPA, we work with entrepreneurs nationwide to help startups establish a strategic business tax plan right from the beginning. If you're launching a new venture, contact us to schedule a consultation, knowing that the choices you make now will be instrumental in setting the stage for your future success.
