Taxes are an inevitable hurdle for any business, if you’re part of a humble start-up or a longstanding corporate conglomerate; you will have to deal with government taxes one way or another.
Despite taxes being generally unavoidable, you don’t have to sit back and let compulsory payments drain your capital without a fight – there are ways for all types of business to handle tax issues in a range of different situations. Whether it’s tax problems plaguing your corporate transactions or formation of your new tech startup, you can do something about tax.
Tax for Large Corporations
Large corporations and complex businesses are naturally going to have to deal with the most complex issues concerning tax. This is simply due to the fact that a more developed company will have the capital and means to take more business actions which will translate into more taxes being taken for a multitude of different reasons.
It would take forever to detail every major way in which large corporations can deal with taxation and lower their outgoings, however, some of the most common ways can be explored. It’s important to stress that a number of companies do buy into grey-hat ways of avoiding tax through legal loopholes and no way are these endorsed.
The two areas we’ll detail here are private equity investment funds and real estate capital markets.
Private Equity Investment Funds
One area in which companies with a high amount of capital often make large gains from is private equity investments. These are direct investments in companies which are not accounted for on the public exchange.
These investments can grow in value over time and the capital generated can be used to fund all manner of growth.
One obstacle in private equity investments, however, is the convoluted nature of the tax on the transactions involved – something that will add up to a fairly high amount if not handled correctly. Depending on what actions your company is taking, there is a correct way to go about it and a wrong way, which is why so many corporations are hiring people like Goodwin to deal with their business tax issues.
Real Estate Capital Markets
Investing in real estate is an extremely important type of transaction for any large company, so naturally, it comes with its own set of tax risks. Large sums will be moving hands on a regular basis, so there are plenty of opportunities for taxes to strain your capital.
Lodha Lincoln Square recently began dealing in London apartments and had to deal with potentially hundreds of thousands pounds worth of taxes on transactions with clients; this was made especially complex due to many of them being international. However, like with private equity, companies hire professionals to best manage how, when, and where money is manipulated in order to minimise expenditure.
Tax for Startups
Startups, or new companies, will usually be doing anything they can to minimise how much they are paying in tax. Considering how competitive the markets can be, especially in fields like technology, it can be tough to stay afloat as a startup and taxes can make the struggle even harder.
The best way that startups can avoid being stung by tax is simply to follow best practices for business tax. These commonly are as follows:
- Becoming the Appropriate Business Entity
- Keeping Track of All Expenses
- Paying Up Every Quarter (Even in Year One)
- Taking Advantage of All Available Deductions
- Seeking the Assistance of a Trained Accountant
We’ll briefly touch on each of these rules of thumb one-by-one.
Becoming the Appropriate Business Entity
Should your startup be a Private Limited Company or a Partnership? Knowing the ins and outs of how each of these types of company is affected by tax regulations can save you potentially thousands in taxation. We’ll take a look at just two of the most common business entity types and how both are affected by US taxes.
Partnerships are companies owned by multiple different people who all have a stake in the business. Investments, resources, profits, and debt go directly to and from all partners who are directly responsible. Despite what could be seen as having a higher risk to deal with by being a partner, there are several advantages of partnerships when it comes to taxes, such as:
- Allocation of elements such as cash flow and income can be shared in such a way that benefits all partners interests
- Double-taxing on profits does not occur as it may with many kinds of corporations
- The process of filing required tax documentation is more simple and straightforward
- Liquidation can be carried out without being taxed, unlike some other business entities.
As can be seen from the above, partnerships may provide all kinds of tax advantages if this business structure suits the company.
Corporations are the next most common type of business and work a little differently than most other entities – this is mainly because they are considered a separate legal entity from their owners and stakeholders. Despite their profits being directly taxed, there are a number of tax advantages to being a corporation, including:
The ability to reduce the amount of tax paid from deductions on a number of different outgoing costs, such as salaries and startup costs.
- Salaries and bonuses are usually tax-free for the corporation
- Well-handled dividends to shareholders can avoid taxation through them being counted as company employees
- Lower tax rates when capital is kept within the company instead of paid out at the end of the year
- Fringe benefits for owners/employees are tax-deductible, meaning no tax is paid on these outgoings.
The conclusion we can reach by looking at both of these different types of business entity is that saving money on tax very much depends on how the business will be structured and how it intends to run.
In order to find out which is the best option for your own business, you will need to dig deeper and find out all of the details of how you will be taxed depending on how you form your business. A well-planned execution can save you potentially thousands over time.
For more information on US taxes on business, be sure to read more on the official IRS website.