No mater how big or small your business is, you need to know your federal tax responsibilities. This is essential since there are a lot of legal and tax issues that often arise with any business. To avoid being caught with your pants down, connect with a tax professional and an attorney before you start your business. They can take care of certain legal and tax issues that come up.

The Internal Revenue Service tells taxpayers to follow specific guidelines to determine whether an activity is a business or a hobby, that is, a non-profit activity. To know your filing obligations, decide whether your activity qualifies as a business and what limitations apply if it’s not a business. Incorrect deduction of hobby expenses take up a huge chunk of the overstated adjustments, deductions, exemptions and credits that amount to $30 billion yearly.

As a rule, taxpayers may deduct ordinary and necessary expenses for a trade or business. The former is a common expense that’s accepted in the taxpayer’s trade or business. A necessary expense, on the other hand, is one that’s appropriate for the business.

Next, decide which business structure is suitable for your business. There are several to choose from and each has its own advantages and disadvantages. These are sole-proprietorship, partnership, limited partnership, corporation, S-corporation, or limited liability company. To know what’s best, take into account liability issues associated with your business and choose one that will give you the best tax structure for your particular line of work.

Depending on the kind of business you plan to pursue, you may require a number of licenses or permits. At the least, you need a business license and tax registration. Research on licensing requirements to get a clear picture.

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