Starting a Business in the United States
A Tax & Compliance Guide for New Entrepreneurs
A practical reference covering entity selection, federal and state obligations, and operational compliance for U.S. taxpayers forming a new business.
Overview
Starting a business in the United States requires selecting the appropriate legal entity, registering with federal and state authorities, and establishing a compliant tax structure. This guide explains the core rules that apply to U.S. taxpayers when forming and operating a business.
Readers will learn how entity choice affects taxation, what filings are required at the federal and state level, and how to maintain proper compliance from the beginning. The guide focuses on practical steps and IRS requirements applicable to U.S. residents.
Why This Matters
Entity selection determines liability protection, tax treatment, payroll obligations, and long-term planning options. Failure to comply with IRS and state requirements can result in penalties, loss of deductions, or reclassification of income.
New business owners frequently underestimate the complexity of payroll compliance, basis tracking, and state-level obligations. Understanding these rules at the outset ensures accurate filings, reduces audit risk, and supports sustainable business growth.
Entity Types & Tax Treatment
IRS requires taxpayers to file returns consistent with their entity's tax classification. The choice of entity affects not only the applicable tax forms but also self-employment tax exposure, payroll obligations, and the ability to deduct business losses.
Federal & State Obligations
Federal Tax Obligations
- An EIN (Employer Identification Number) is required for all business entities except sole proprietors with no employees and no excise tax obligations. Apply via Form SS-4 or online at IRS.gov.
- An annual federal tax return must be filed based on entity classification (see Filing Requirements table).
- Pass-through entity owners must make quarterly estimated tax payments using Form 1040-ES if they expect to owe $1,000 or more for the year.
- Payroll tax filings — Form 941, Form 940, W-2, and W-3 — are required for any entity with employees, including S-Corp owner-employees.
- Form 1099-NEC must be issued to any unincorporated contractor paid $2,000 or more during the tax year. This threshold was raised from $600 to $2,000 effective January 1, 2026 under the One Big Beautiful Bill Act (OBBBA); for payments made in tax year 2025 or earlier, the prior $600 threshold still applies. Beginning in 2027, the threshold will be adjusted annually for inflation.
State-Level Requirements
- Business registration with the Secretary of State is required in the state of formation and in any state where the business has nexus.
- Annual reports and franchise taxes are required in most states; amounts, due dates, and methods of calculation vary significantly by state.
- State income tax and sales tax registration is required where the business sells taxable goods or services.
- Local business licenses, zoning permits, and industry-specific licenses may be required depending on location and business type.
Operational Compliance Concepts
Beyond filing requirements, IRS and courts expect businesses to maintain operational standards that substantiate tax positions and preserve legal protections.
Step-by-Step Guidance
- Evaluate liability exposure, projected income level, and administrative burden.
- Consider whether an S-Corp election will generate meaningful self-employment tax savings relative to payroll compliance costs.
- Determine ownership structure and long-term goals — growth, investment, or eventual sale.
- File Articles of Organization (LLC) or Articles of Incorporation (Corporation) with the Secretary of State.
- Appoint a registered agent in the state of formation.
- Obtain an EIN from IRS — apply online at IRS.gov or submit Form SS-4.
- Draft an Operating Agreement (LLC) or Corporate Bylaws (Corporation).
- Open a dedicated business bank account — separate from all personal accounts.
- Implement a bookkeeping system (QuickBooks, Xero, or equivalent) and begin recording transactions from day one.
- Establish an expense tracking and receipt retention system.
- Set up a payroll system if hiring employees or electing S-Corp status.
- Apply for state income tax withholding accounts if hiring employees.
- Register for a sales tax permit in each state where the business sells taxable goods or services.
- Obtain required local business licenses and confirm zoning compliance for any physical location.
- Identify the correct federal tax return for the entity's classification.
- Calculate quarterly estimated tax payment due dates: April 15, June 15, September 15, and January 15.
- Confirm state annual report and franchise tax deadlines.
- Plan for 1099-NEC filings for contractors paid $2,000 or more(2026 threshold under OBBBA) — due January 31.
- Corporations must hold annual meetings and maintain written minutes of major decisions.
- LLCs should maintain and update the Operating Agreement when ownership or terms change.
- Track all capital contributions and distributions with supporting documentation.
- Avoid commingling personal and business funds at all times.
Filing Requirements Summary
IRS requires taxpayers to file the return corresponding to their entity's tax classification. The table below summarizes the primary federal forms applicable to each entity type.
| Form | Entity / Situation | Notes |
|---|---|---|
| Schedule C | Sole Proprietorship / Disregarded SMLLC | Filed with personal Form 1040; self-employment tax applies |
| Form 1065 | Multi-Member LLC / Partnership | Schedule K-1 issued to each partner; due March 15 |
| Form 1120-S | S-Corporation | Schedule K-1 issued to shareholders; payroll required for active owners; due March 15 |
| Form 1120 | C-Corporation | Separate corporate tax return; due April 15 |
| Form 2553 | S-Corp Election | Must be filed within 75 days of the start of the effective tax year |
| Form 941 | Any entity with employees | Quarterly payroll tax return; due April 30, July 31, October 31, January 31 |
| Form 940 | Any entity with employees | Annual FUTA (federal unemployment tax) return; due January 31 |
| W-2 / W-3 | Any entity with employees | Employee wage statements; due to employees and SSA by January 31 |
| Form 1099-NEC | Any entity paying contractors | Required for unincorporated contractors paid $2,000+ (effective 2026; $600 threshold applies through tax year 2025); due January 31 |
| Form 1040-ES | Pass-through entity owners | Quarterly estimated tax payments; required if anticipated tax owed ≥ $1,000 |
Practical Examples
A taxpayer begins freelance consulting with no employees and no formal entity. Income is reported directly on Schedule C attached to Form 1040. Net profit is subject to both income tax and self-employment tax (15.3% on the first $168,600 of net earnings for 2024).
- No separate entity registration required
- Quarterly estimated taxes due via Form 1040-ES
- Business expenses — home office, mileage, equipment — are deductible on Schedule C
A designer forms a single-member LLC and elects S-Corporation status by filing Form 2553. As an active owner-employee, IRS requires her to receive a reasonable salary subject to payroll tax. Profit above the salary is distributed and is not subject to self-employment tax, generating potential tax savings.
- Annual return: Form 1120-S; owner receives Schedule K-1
- Payroll: quarterly Form 941, annual Form 940, and year-end W-2
- S-Corp election is cost-effective primarily when net profit exceeds approximately $40,000–$50,000 annually
Two co-owners open a retail store as a multi-member LLC. The LLC is classified as a partnership for federal tax purposes. The entity files Form 1065, and each partner receives a Schedule K-1 reporting their allocable share of income, loss, and credits.
- State sales tax registration required before first sale
- Each partner must make individual quarterly estimated tax payments based on their K-1 share
- Basis must be tracked separately for each partner
Common Mistakes
- 1 Choosing an entity without understanding the tax implications. Each entity type carries distinct self-employment tax, payroll, and filing obligations. Selection should be based on projected income, not administrative simplicity alone.
- 2 Failing to run payroll for S-Corp owners. IRS requires active owner-employees to receive reasonable compensation. Taking only distributions is a recognized audit trigger that can result in payroll tax assessments and penalties.
- 3 Commingling personal and business funds. Using a personal bank account for business transactions undermines liability protection and makes bookkeeping — and audit defense — significantly more difficult.
- 4 Not filing quarterly estimated taxes. Pass-through entity owners who underpay estimated taxes may be subject to an underpayment penalty under IRC §6654, even if the annual return is filed on time.
- 5 Ignoring state franchise taxes and annual reports. States such as California and Delaware impose minimum franchise taxes regardless of income or activity level. Missed filings result in penalties and potential administrative dissolution of the entity.
- 6 Misclassifying employees as independent contractors. IRS applies a multi-factor test to determine worker classification. Misclassification exposes the business to back payroll taxes, interest, and penalties under IRC §3509.
- 7 Failing to issue Form 1099-NEC to contractors. Effective January 1, 2026, businesses must issue Form 1099-NEC when payments to an unincorporated contractor reach $2,000 or more in a calendar year (raised from $600 under the One Big Beautiful Bill Act). The prior $600 threshold applies through tax year 2025. Failure to file can result in penalties of $60–$670 per form depending on how late the filing is. Note that income below the reporting threshold remains taxable to the contractor regardless of whether a 1099 is issued.
- 8 Poor bookkeeping leading to audit exposure. IRS requires taxpayers to maintain records sufficient to substantiate all items on a return. Inadequate records result in disallowed deductions and increased tax liability on examination.
Hanmi CPA Insight
The most important decision when starting a business is selecting the correct entity and establishing a compliant financial structure from the beginning. Many new entrepreneurs underestimate the complexity of payroll compliance, basis tracking, and state-level obligations.
A well-designed structure reduces tax liability, protects personal assets, and supports long-term growth. In particular, the decision to elect S-Corp status should be based on a careful analysis of projected net income, reasonable compensation benchmarks, and the cost of payroll administration — not simply on the assumption that it will always produce savings.
Proper planning during the first year prevents costly corrections later and ensures the business remains compliant with IRS and state requirements throughout its operating life.