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Tax ID and Classification

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Tax ID and Classification

Tax liability is one of the most important considerations when starting a new business. No matter which type of business entity you choose (see Incorporation, S-Corporation, LLC or Partnership), it is critical to seek professional advice before choosing a particular tax classification for your business.

When you start your new business, you will need to apply for an Employer Identification Number (EIN), also known as a Tax ID Number. Don’t be fooled by its name. Even if you don’t intend to hire employees in your business, you will need to obtain an EIN from the IRS for your business so that your business and individual tax returns are distinguished.

Different types of business entities provide you with several options for tax classification. An S-Corporation will allow you to reduce your self-employment tax liability but provides less flexibility if you are starting a new business with a partner. If you form a single-member LLC, you may elect to be treated by the IRS as a disregarded entity which may help simplify your annual tax preparation. On the other hand, if your LLC has multiple members, you can select partnership tax classification which will provide you with much flexibility in allocating profits and losses between members.

Electing the wrong tax classification may create unwanted problems for your new business. It can be costly and time consuming to change your tax classification with the IRS and the agency often requires you to wait until the following calendar year before the new tax classification takes effect. This can cost you thousands in tax liabilities that might have otherwise been reduced or avoided if you elected the appropriate tax classification for your business at the time of its formation.

At Tailored Legal, our business attorney can apply for and obtain a new Tax ID number and help you select the most favorable tax classification for your business. We will also utilize our trusted network of financial and accounting advisors to ensure the tax classification you select is appropriate for your type of business. Contact us for a no cost consultation today to discuss the right tax classification for your business.


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