by Chris S. Millias and Warren Chung of OUM & Co. LLP
Successful entrepreneurs start with a vision. They spend a lot of time, effort and resources on developing a business plan, and even more time and effort on raising capital, finding the right people and developing strategic partners. They work with attorneys to form corporate structures and help with financing agreements. Usually, the last thing they think about is when they should be talking to a CPA firm about their business lifecycle.
We use words and phrases like accounting software, back-office support, tax planning and compliance, budgetary control, cash flow analysis, internal controls and segregation of duties; however, many entrepreneurs don’t have a full grasp on what these actually mean and how they can assist in growing their businesses. It’s never too early to build a relationship with a trusted advisor, like a CPA, to understand the financial inner workings of the company. Think of it as quantum theory – small early steps can lead to huge benefits.
Once an entrepreneur has their books and records aligned, they cannot forget about the one thing that is certain in life – taxes! Whether the company has taxable income or generating substantial loss, there are various tax filing requirements and obligations that the company will have to follow to be in compliance with state and federal regulations.
A U.S. company will be subject to the filing of federal Form 1120, U.S. Corporation Income Tax Return and the state corporate income or franchise tax return. All companies, profitable or not, have to timely file their income tax returns. Depending on the state where the company is doing business, even a company having loss may have to pay state franchise tax for the privilege of doing business in that state. California and Massachusetts have state minimum taxes, whereas states such as Alabama and Tennessee impose franchise tax based on capital/equity.
If the company is doing well enough and projecting income for the year, there may be federal quarterly estimated taxes due. Failure to remit sufficient quarterly estimated taxes may trigger underpayment penalties and interest upon filing of the company’s federal income tax return. There are state estimated taxes similar to federal, but the requirement thresholds vary by state. As such, a company will need to check on the state specific rules.
In addition to paying state taxes, the company also needs to maintain good standing with the state where they are doing business by filing the applicable forms. For example, a company registered to do business in California needs to timely file the Statement of Information with the Secretary of State. Not adhering to the filing requirement may cause the company’s business status to be suspended or forfeited, which would require the company to revive the status with the state.
If the company considers increasing its international footprint by setting up a foreign subsidiary, or investing in a foreign partnership, or getting funded by a foreign shareholder, they must be mindful of an additional return to be included with Form 1120. There could be filing requirement of Form 5471, Return of U.S. Persons With Respect To Certain Foreign Corporations, Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. The company is required to furnish the applicable form and report activities with its foreign related parties. Failure to timely file the form is subject to a $10,000 penalty. Penalty abatement may be available, but the procedures vary based on the company’s situation.
*The examples provided are based on general facts for illustration purposes only. Please consult your tax advisor to discuss your tax filing and liability obligations according to your facts and circumstances.
Chris S. Millias is the managing partner and co-founder of OUM & Co. LLP. Based in San Francisco, Millias has over 35 years of experience in assurance and advisory services, handling audits of publicly held and privately held clients in a wide range of industries.
Warren Chung is a partner in the San Francisco office of OUM & Co. LLP. He specializes in corporate tax, advising businesses ranging from startups to large public companies on compliance and provision issues.