With unemployment rising, some people find their best option is to start a business for themselves. Thanks to today’s technology and business practices, this has never been easier, and could represent a great opportunity. However, when you set up a modern, cutting-edge business, you need to take one old-time concern into account: taxes.

The corporate tax structure you choose when you set up a business can affect your personal and tax liability. Therefore, before you go into business, it is a good idea to have a conversation with a corporate tax specialist about some of the key issues that can affect which corporate structure is right for your business.

Setting up Shop

When it comes to setting up a new business, you may have everything you need at your fingertips. Anyone with business experience has had a chance to learn some of the keys to running a successful operation, and may also have an insight or two about what to do differently. Web designers can set you up with an online business cheaply and easily than it would cost to rent office space. Credit card processing companies can expedite the handling of receivables for you, and office equipment leasing can lower the barrier to give you the physical tools your operation needs.

It’s all so straightforward that it might be tempting to keep it simple and operate as a sole proprietorship. However, there are good reasons to consider a more formal corporate structure. Which kind of formal structure? That depends on the following issues:

1. Business Liability. Perhaps the foremost reason for setting up a formal corporate structure is to shield yourself from personal liability. If you don’t feel your business practices could incur any liability, by all means operate as a sole proprietorship. In most cases though, you may find it better to have a separate corporate entity take on the liability for business operations.
2. C-corporation. While setting up a corporation can reduce your personal liability, it only works if you respect that corporation as a separate entity. You have to be willing to follow formal corporate procedures, and not simply treat the business as an extension of your personal affairs.
3. Property and equipment leasing opportunities. While you need to respect the separation between yourself and the corporate entity, that doesn’t mean there can’t be any dealings between the two. You may have the opportunity to lease property or equipment to the business, or even charge for services like Website design. The idea is to shift tax responsibility between you and the corporation according to which is more favorable. However, any such dealings have to be on terms that would make sense for an arm’s length transaction.
4. Personal tax vs. corporate tax. The idea of shifting tax responsibility is based on one of the most fundamental benefits of a corporate structure. There are often differences between personal and corporate tax rates and accounting procedures. For example, corporate tax rates are often lower than personal tax rates. However, the commonly-used C-corporation structure can expose earnings to double taxation–once at the corporate level and then again when earnings are distributed to shareholders.
5. Company growth rate. Structures such as limited liability companies and S-corporations are able to avoid double taxation by passing the tax liability directly through to the owners of the company. However, a fast-growing company that anticipates needing capital in the future may want to retain earnings for that purpose. In that case, a C-corporation structure may be better, because the tax rate on earnings is likely to be lower at the corporate level, and if earnings aren’t distributed immediately, double-taxation can be avoided or postponed.
6. Company size. Regarding the S-corporation vs. C-corporation issue, size may be the deciding factor because S-corporations are limited to 75 shareholders.
7. Benefit plans. An important tax advantage of incorporation is the treatment of health and retirement benefits. Compared to an individual, a corporation may be able to deduct health insurance more readily and defer taxes on a larger amount of retirement savings.
8. State income tax. State taxes can vary for different corporate structures, so this is a location-specific factor you need to take into consideration.

Making the Choice

As the above issues suggest, the right choice of corporate structure for tax and other purposes is very much a function of conditions specific to your business. That’s why there is no pat answer to the question of what is the “best” corporate structure, but knowing what the relevant issues are, can help you find the best answer for your specific situation.

With government bailouts being targeted to help big business from banks to automakers, when can a small business expect a break? There may not be any bailout package slated for your small business, but you can give yourself a break by making sure you don’t overlook the many ways a small business can lighten its tax load.

Being aware of these potential tax breaks should not only help you in preparing last year’s tax return, but it may even guide several key decisions in the year ahead. Decisions about office equipment leasing vs. purchasing, whether to invest in website design and e-commerce solutions, and when to start up a health or retirement plan all have important tax implications for a small business.

Here are some critical tax issues for you to consider:

1. Office equipment leasing is treated differently from a purchase. Equipment purchases have to be capitalized, which means amortizing the cost of the equipment over a period of years. As a result, you have to commit to the investment upfront, but only realize the tax benefit as the accounting value of the equipment depreciates year by year. Equipment leasing might represent a better match between your outgoing cash flow and the ability to deduct the expense, because in many cases lease charges can be fully deductible as an expense. However, leases with purchase options can cross the line to being considered as a purchase for tax purposes, so it is important to check the specifics of any lease structure.
2. Small businesses may benefit from special incentives to start a retirement plan. A special tax credit may apply for small businesses with less than 100 employees that start a retirement plan for the first time. This tax credit is slated to expire for tax years beginning after 2010, so this creates an immediate window in which it might be a particularly good time to start a retirement plan.
3. Small business owners can deduct health insurance costs directly. A small business owner can take a direct deduction for the cost of health insurance for the business owner and his or her spouse. This is in contrast with treating health insurance costs as a normal itemized deduction, so the small business owner can benefit even in cases when overall deductions do not meet the threshold for itemization.
4. Tax treatment of Web design expenses can vary. This is an evolving area of tax law, but what seems to be emerging are different treatments of Web design expenses, depending on how they are incurred. Some Web design costs must be amortized over the useful life of the resulting applications, while others can be expensed as they are incurred. Knowing the difference may help mitigate the cost of investing in Web design firms.
5. Many e-commerce solutions can represent deductible expenses. Beyond Web design, there are number of other expenses related to e-commerce solutions that can be deducted as normal costs of doing business. This can include Internet Marketing such as SEO and Pay Per Click, so before planning a budget for e-commerce solutions, you would be wise to know the tax treatment of these expenses. This may make that e-commerce budget more palatable on an after-tax basis.
6. Don’t neglect to deduct business mileage. It may seem like an obvious detail, but small business owners end up running so many errands on behalf of the business that it is easy to overlook tracking the mileage for expense purposes. The commute between work and home is generally not deductible, but otherwise, you’ll want to keep careful records of business-related driving, and be sure to use the most up-to-date Internal Revenue Service mileage rate for computing this deduction.

Keep in mind that it is important to consult with your tax consultant before pursuing any tax-related strategies. There are many variables that affect taxation from one business to the next, including state of domicile and market, corporate structure, and profitability status. In addition, tax laws often change from year to year, so with any tax preparation you must make sure it is fully up-to-date, and applies to your business.

An important take away from this discussion should be that the time to consult tax preparation firms is not only during tax return season. Tax treatment can affect many of the business decisions you make, and in some cases, can make investing in the business less expensive than it might seem on the surface. Therefore, it is a good idea to check the tax ramifications of any major decision before you commit. You and your tax consultant might just find a way to give your business a little break.