Starting a Business: Tax and Accounting Essentials From Day One

Starting a business is exciting. It is also full of decisions that have real, lasting tax consequences — decisions that are much easier to get right at the beginning than to fix later. Here are the essentials every new business owner should address from day one.

Your entity structure determines how your business income is taxed, what liability protection you have, and what compliance obligations you face. The main options:

Sole Proprietorship The default for a single-owner business with no formal structure. Simple to set up, but all income is subject to self-employment tax (15.3%), and there is no liability protection.

Single-Member LLC Taxed the same as a sole proprietorship by default, but provides liability protection and a more professional structure. Can later elect S Corp status when profits justify it.

Multi-Member LLC Taxed as a partnership by default. Each member reports their share of income on their personal return. Flexible, but requires a solid operating agreement.

S Corporation A tax election (not a separate entity type) that allows owners to split income between salary and distributions, reducing self-employment tax. Best for businesses with consistent profits above $40,000–$50,000.

C Corporation Subject to corporate income tax at the entity level. Generally not recommended for small businesses unless you are raising venture capital or have specific reasons to retain earnings at the corporate level.

The right choice depends on your profit level, number of owners, long-term goals, and risk tolerance. This is one of the most important decisions you will make — get a CPA or EA involved before you file anything.

An Employer Identification Number (EIN) is your business's tax ID. You need one to:

• Open a business bank account
• Hire employees
• File business tax returns
• Apply for business credit

Apply for your EIN at IRS.gov — it is free and takes about 10 minutes online. Do not pay a third-party service to do this for you.

This is non-negotiable. Mixing personal and business finances creates a bookkeeping nightmare, complicates your tax return, and can undermine your liability protection.

Open a dedicated business checking account the day you form your entity. Run all business income and expenses through it. Your future accountant will thank you.

You cannot manage what you do not measure. From day one, track:

• Revenue: Every dollar coming in
• Expenses: Every dollar going out, categorized correctly
• Mileage: If you use a personal vehicle for business
• Home office: If you work from home (square footage matters)

Cloud-based accounting software like QuickBooks Online or Xero makes this manageable. Set it up early — catching up on a year of disorganized records is expensive.

You will need to choose between two accounting methods:

Cash basis: You record income when you receive it and expenses when you pay them. Simpler and most common for small businesses.

Accrual basis: You record income when it is earned and expenses when they are incurred, regardless of when cash changes hands. Required for businesses with inventory or revenues above $25 million.

Most small businesses start on the cash basis. Changing methods later requires IRS approval, so choose intentionally.

New business owners are often surprised by the variety of taxes they owe. Depending on your structure and activities, you may be responsible for:

• Federal income tax (quarterly estimated payments)
• Self-employment tax (if you are a sole proprietor or partner)
• Payroll taxes (if you have employees)
• Arizona transaction privilege tax (if you sell taxable goods or services in AZ)
• Arizona income tax (state estimated payments)

Missing quarterly estimated tax payments results in underpayment penalties. Set aside 25–30% of your net profit for taxes from the very first dollar you earn.

One of the advantages of running a business is the ability to deduct legitimate business expenses. Common deductions include:

• Office rent or home office (Form 8829)
• Business equipment and software (Section 179 or bonus depreciation)
• Vehicle use (standard mileage or actual expenses)
• Professional services (accounting, legal, consulting)
• Business insurance
• Marketing and advertising
• Business meals (50% deductible)
• Education and training directly related to your business

Keep receipts. The IRS requires documentation for all deductions, and "I remember spending it" is not sufficient in an audit.

Many new business owners try to handle everything themselves to save money. That is understandable — but the cost of fixing mistakes made in year one often exceeds what it would have cost to get it right from the start.

At minimum, work with a CPA or EA to:

• Choose your entity structure
• Set up your chart of accounts
• File your first-year return correctly
• Establish a tax planning strategy

The goal is not just compliance — it is building a financial foundation that supports growth.

Our team works with new and growing businesses throughout Arizona and nationwide. Whether you are still deciding on an entity structure or you are already operating and need to get your books in order, we can help. See how our small business tax services and bookkeeping services support businesses at every stage.

Contact us to schedule a new business consultation.