There are a lot of people who get confused when they hear the term “small business.” What is it? How does it affect you? These are just some of the questions that people like to ask about small businesses.
A small business is defined as any corporation, partnership, or sole proprietorship that has fewer employees than the annual receipts for that company. The definition of a small business also takes into account the number of employees who actually perform the duties needed for the business. If there are only a few employees, this doesn’t matter as much in your income tax strategy. However, if you have a large number of employees, you have two income-producing items that are being neglected here.
The next question that comes to mind when most people hear the term “small business” is whether or not they fall into the definition of a sole proprietorship. A sole proprietorship is defined as any business entity that owns nothing but its own products, although there may be some assets owned by others. This can include small businesses, partnerships, and LLCs.
The next question is what happens if you have five employees or less. If you fall into the five employee, or the definition of small business, then you are still a small business. That doesn’t mean you don’t need to account for your expenses any more. Some S corporations and sole proprietor businesses have their own personal expenses that have to be recorded and reported on your personal tax return. Some people choose to put those expenses on their individual tax return instead of the business one. However, there are penalties associated with this for the simple reason that the government must maintain records for each of these.
One last question that many people have is about LLCs. An LLC is different from a corporation even though they are still considered to be a separate entity from their owners. An LLC is not considered a business. The IRS has defined a LLC as any one person who owns and manages an LLC but doesn’t have to file a yearly tax return. This makes them a bit easier to track because you have only one account to pay instead of several.
There are many different factors that go into determining the classification of a business as small or large. For small businesses the factors that determine classification as fire extinguisher small include the number of employees, how many customers you have, and your average annual revenues. Large businesses often have higher than average annual revenues and more employees. It is important that you are very clear on which classification you fall under so you can start to apply the correct rules and regulations to your business expenses.