Entity & Setup Basics

When your income comes from a business you own, whether as a sole proprietor, a single-member LLC, or an owner of a partnership or S corporation, no federal tax is withheld for you the way it is from a paycheck. Under §6654, the U.S. tax system still requires that tax to be paid in as the income is earned, so the obligation to pay quarterly falls on you as an individual. The first year of ownership creates a specific planning problem: the prior-year safe harbor under §6654 may not reflect any business income at all, which means your estimates have to be built from a current-year projection with real uncertainty baked in. If your household also has W-2 income, your spouse's withholding counts toward the same safe-harbor tests when you file jointly, which changes the calculation. And if you co-own the business with others, you cannot assume anyone else is managing your personal payments for you. This article explains the framework so you know what questions to ask and when to bring a CPA into the conversation before a penalty accrues.

A startup cost is an expense you incur before your business is open and actively earning revenue. Unlike ordinary business expenses, which are generally deductible in the year they occur, startup costs receive special treatment under the federal tax code — specifically IRC Section 195 — because they happen before a trade or business legally exists. Understanding the distinction matters because it affects when and how much of those costs you can deduct. The rules described here reflect the general federal framework; specific thresholds can change, and a CPA can help you apply them to your situation.

When you start a business, one of the first decisions is choosing a legal and tax structure. The five most common options—sole proprietorship, partnership, LLC, S corporation, and C corporation—differ in how they protect your personal assets, how business income is taxed, and how much administrative work they require. An LLC is a legal form created under state law, not a tax classification on its own; the IRS can tax an LLC several different ways depending on elections made and the number of owners. Partnerships are a distinct structure with their own variations and liability considerations. Understanding these distinctions at a general level can help you ask better questions when you work with a licensed attorney or CPA.

A sole proprietorship is the simplest business structure in the United States — and it's the one most people start with without ever making a conscious choice. When an individual earns money from self-employment and hasn't formed a separate legal entity like an LLC or corporation, they are automatically a sole proprietor in the eyes of the tax law. There's no state filing, no registration fee, and no paperwork required to "become" one. Understanding this default status matters because it shapes how business income is reported, how self-employment taxes work, and what liability exposure the owner carries.

Forming an LLC is one of the first questions new business owners ask, but it's often based on a few common misconceptions. You don't need an LLC to legally operate a business, and forming one doesn't automatically make your activity a business in the eyes of the IRS. An LLC is a legal structure that can offer liability protection, but it isn't a magic switch for deductions or legitimacy. Before forming one, it's worth understanding what an LLC actually does and what it doesn't.