Starting a Business

The following steps will assist in starting your business.

The Business Xpress​ is a cooperative effort of state agencies and your first stop for starting a business in Oregon.

It helps to begin with a plan. A business plan is a blueprint for every aspect of your business. Sales, marketing, advertising, promotion, and location are some aspects of creating a plan. For a tutorial on creating a business plan, visit the U.S. Small Business Administration.

The Oregon Business Guide lists three categories of business assistance programs.

Oregon’s Economic and Community Development Department provides reports and services for and about Oregon businesses.

Select a business entity type from the following list for an overview of the principal types of legal business structures in Oregon. A legal representative and accountant should be consulted before determining the type of business entity to form.

  • Sole proprietorship
  • Corporation
  • Nonprofit
  • Limited liability company (LLC)
  • Limited partnership (LP)
  • General partnership
  • Limited liability partnership (LLP)

For a more in-depth look at business structures, see Which is Your Best Tax-Deduction Business Entity below.

Check the Business Registry Database for name availability.

Note: Sole proprietors may conduct business under their own name or choose an assumed business name.

When starting a new business, there are important decisions to make and rules and procedures to be addressed. First, are you required to register your business in Oregon?

The Oregon Secretary of State’s Corporation Division is the place to register your corporation, nonprofit corporation, assumed business name, limited liability company, limited liability partnership, Oregon trademark, or service mark. Go to the Oregon Business Registry Online to file a business online or download forms to print and mail.

Understanding tax obligations is important for any business. The Business Information Center has information about Oregon and federal income taxes.

Most businesses need to apply to the Internal Revenue Service for a federal Employer Identification Number (EIN)​. You can apply online through the IRS. For more information:

Many occupations and business activities require licenses, permits or certifications from state agencies or boards. The state of Oregon has a searchable License Directory with over 1,100 licenses, permits, and certifications. The Business Information Center also provides state license requirements. Construction and landscape contractors need to register with the Construction Contractors Board or Landscape Contractors Board.

Cities and counties may also require businesses to have a license or permit. Check with your city and county government to determine license, permit or zoning requirements.

Protect your idea. Learn about registering patents, copyrights, trademarks, and service marks with the state of Oregon and the federal government.

Check with the Department of Environmental Quality (DEQ). Some business activities require you to contact DEQ.

Determine whether you comply with the Americans with Disabilities Act (ADA). Many businesses are subject to this federal law which prohibits discrimination against disabled persons.

Keep your reporting and registration obligations current. Businesses registered with the Secretary of State Corporation Division must file annual reports and renew registration information. We mail payment coupons about 45 days before your renewal due date. Check Renew Online for more information.

Nonprofit organizations engaging in charitable activities need to file annual reports with the Oregon Department of Justice (DOJ), Charitable Activities Section, and the Internal Revenue Service. Check Information for Nonprofit Organizations.​

Are you thinking about starting a new business? If so, congratulations.

We know it can and probably will be an exciting ride. But like many other exciting rides starting or buying your own business can be fraught with dangers, not the least of which are potential tax pitfalls.

In one recent case, a decorated ex-Air Force pilot sought to start an aviation business. She hoped to offer aerial land surveys, photography, and flight charters, along with the provision of aviation safety consulting.

She traveled the country looking to buy an airplane, which she eventually did. Unfortunately, she never got past the preparatory stage, and without clients, gross receipts, or service contracts; the court ruled she was not entitled to deduct any of her expenses.1

You can avoid this woman’s tragic consequences and write off all your costs, including those “thinking about it” costs. But since this is tax law, you face some tricky rules that can prove costly, as they did for our pilot.

This article explains the rules for starting a new business so you can understand them and earn all the tax benefits the tax code offers. And the tax benefits are more than you would think. They begin when you start spending money while thinking about this new business.

Bucket of Tax Deductions for Thinking about the New Business and More

In its business expenses publication, the IRS says start-up costs include those incurred in creating an active trade or business.2 Note the word “creating,” and keep that in mind while reading the next few paragraphs. (Remember, this article is about creating a new business versus buying or expanding your current business.)

The tax code states that start-up expenses arise when you spend money to3

  • investigate the creation or acquisition of an active business,
  • create an active business, or
  • engage in a for-profit or production of income activity before the day the active business begins, in anticipation that such activity will become an active business.

As we discussed in Tax Benefits for Thinking about and/or Starting a New Business, the expenses can include:

  • Travel expenses to gain knowledge from others already in the business
  • Entertainment expenses to pick the brains of friends and business acquaintances
  • A host of training costs
  • Certain automobile expenses
  • Long-distance, investigatory telephone calls
  • And many more

To qualify as a start-up expense, the expense must be both4

  1. a cost that you could deduct as a business expense if the business already existed, and
  2. a cost incurred before your business begins

Here are additional expenses that can qualify as start-up expenses:5

  • Money paid for the potential market, labor supply, transportation, or product surveys or analyses
  • Advertising expenses incurred before opening
  • Wages paid before opening to your new employees and their trainers
  • Costs incurred to secure distributors, suppliers, and customers
  • Fees paid to consultants and other professionals

Costs That Don’t Qualify as Start-Up but Provide Tax Benefits

Costs that don’t qualify as start-up include deductible interest,6 taxes,7 and research and development costs.8 But not to worry: you generally deduct these expenses under other tax law provisions.

Tax Benefits Begin to Accrue Right Away

You have to wait until the new business starts realizing the tax benefits of your start-up expenses.

But you can start earning tax benefits as soon as you begin thinking about creating your new business. This is particularly helpful since taxpayers usually start running up expenses long before opening their doors for business.

The Write-Off

The tax law allows and automatically deems that you select to deduct up to $5,000 of start-up expenditures in the year your business becomes active.9 The tax code reduces your immediate, up­ to-$5,000 write-off dollar for dollar, for start-up expenses exceeding $50,000.10

You don’t lose any excess. Any start-up expenses you can’t deduct up front, such as the $5,000, you amortize on a straight-line basis over 180 months beginning with the month the business begins.11

Example 1. Say you, a calendar-year taxpayer, spend $5,000 on start-up expenses related to a business that is up and running on May 1, 2017. You deduct the $5,000 in 2017.

Example 2. The facts are the same, but instead of spending $5,000 on start-up expenses, your total outlay amounts to $41,000. In 2017, you deduct $5,000 plus the portion of the remaining $36,000 allocable to May­ December, or $1,600 ($36,000/180 x 8).

Example 3. Same facts, but this time your total expenses are $54,500. Because your start-up expenses exceed

$50,000, your 2017 deduction equals $500 ($5,000 – $4,500) plus that portion of the remaining $54,000 allocable to May-December, or $2,400 ($54,000/180 x 8).

Wait-If It’s a Corporation, It Gets Even Better

If you decide to form your new business as a corporation, the tax code allows you to elect to amortize even more expenses in the form of “organizational costs.”12 The same principles apply as with start-up costs: current deduction of up to $5,000, reduced (but not below zero) by organizational expenditures that exceed $50,000, and the remainder of such organizational expenditures are deducted evenly over the 180 months beginning with the month in which the corporation begins business.13

Qualifying organizational costs are generally those paid to create the corporation. To qualify, the cost must be14

  • for the creation of the corporation;
  • chargeable to a capital account;
  • amortized over the fixed life of the corporation, if any; and
  • incurred before the end of the first year of business

Common examples include the following:15

  • Legal and accounting services
  • State incorporation fees
  • Temporary director expenses
  • Costs of organizational meetings

Finally, you can also amortize organizational costs similarly and to the same degree if you form your new business as a partnership.16

The requirements are similar, with the cost qualifying only if it is17

  • for the creation of the partnership;
  • chargeable to a capital account;
  • amortizable over any fixed life of the partnership; and
  • incurred by the due date of the partnership’s first tax return.

What Does All This Mean for Me?

If your attempt to enter the business is successful and you open your doors, you’re in good shape. You’ll be able to take advantage of the benefits discussed above. As always, it’s a good idea to keep detailed and accurate records to substantiate your start-up and organizational costs in case the IRS decides to challenge you.

Problems can arise with writing off your start-up expenses if your start-up does reach the stage of an active business. You saw what happened to the pilot. And there’s no clear explanation of what constitutes an active business. You win active business status based on facts and circumstances.

You reach active business status when you operate as a going concern, with attributes such as performing your professional activities (e.g., a dentist seeing patients or a salesperson making sales calls), having your office space and equipment in place, and whatever else makes the business go.

If the business fails after you start, you write off any unamortized start-up costs.18 With the corporate structure, you likely can qualify for an ordinary loss deduction on your small-business stock.

Takeaways

The moment you start thinking about starting your own business, you begin to accrue tax benefits, known as start-up expenses. Make sure you document those start-up expenses, which are, by definition,

  • expenses that would be deductible if the business existed, and
  • expenses that you paid before the business started.

And then, don’t be like our pilot who failed to start the business. You need to start and make the business an active business for the start-up expenses to produce benefits. Your business can fail after it starts, and you can realize the unamortized deductions, but you have to start first.

Tizard v Commissioner, T.C. Summary Op. 2016-42.

  • IRS Publication 535, Business Expenses (2015), Dated Jan. 7, 2016.
  • IRC Section 195(c)(1)(A).
  • Ibid.
  • Ibid.
  • IRC Sections 163; 195(c)(1)(B).
  • IRC Sections 164(a); 195(c)(1)(B).
  • IRC Sections 174; 195(c)(1)(B).
  • In other words, the election to amortize start-up expenditures is automatically deemed to have been made.
  • IRC Section 195(b)(1)(A); all of your start-up expenses related to the active conduct or to your trade or business are counted in figuring out whether your start-up expenses exceed this amount. Reg. Section 1.195-1(a).
  • IRC Section 195(b)(1)(B); Reg. Section 1.195-1(a).
  • IRC Section 248.
  • IRC Section 248(a).
  • IRC Section 248(b).
  • Reg. Section 1.248-1(b)(2). Not included are costs associated with issuing and selling corporate stock or other securities and costs related to transferring assets to the corporation. Reg. Section 1.248-1(b)(3).
  • IRC Section 709(b)(1).
  • IRC Section 709(b)(3).
  • IRC Section 195(b)(2).

Your choice of business entity adds or subtracts tax benefits.

As tax laws and your personal situation change, your original choice of business entity may no longer generate the best tax deductions.

You might need liability protection above what insurance can cover. If so, your proprietorship is not appropriate, and you need to look at the S corporation, the C corporation, and the single-member limited liability company (LLC).

Selecting your best business entity is not easy. You have both tax benefits and liability exposure to consider. This article, the first of a series on the choice of business entity, helps you make a more informed choice regarding your business entity.

Avoid the Big Mistake

Assuming you have the liability protection issue covered, make sure your choice of business entity gives you the most tax deductions and best tax benefits.

You have one way to know that the business entity you selected is the best. You need to see it in writing. You also need to review it periodically by seeing it again in writing.

The “seeing it” part means a pencil-to-paper comparison of business entities. Let’s say you have operated as a proprietorship and now need to compare the proprietorship to the S corporation. Your comparison might look like this:

Step 1: Net cash from proprietorshipProprietorship
Net income from proprietor’s tax return (after deducting wages to your two children under age 18)$150,000
Less federal income taxes paid-33,000
Less Social Security and Medicare taxes paid-16,000
Net cash to spend with proprietorship$101,000
Step 2: Net cash from S CorporationS Corporation
Start with net cash to spend with proprietorship and make adjustments$101,00
Cash saved with S corporation on Social Security and Medicare taxes with a $75,000 salary and $75,000 in distributions6,000
Cash lost because the S corporation triggers payroll taxes on the hiring of your two children-6,000
Estimated present value of annual after-tax cash loss on retirement benefits due to contribution at the S corporation level being limited to $75,000 salary income (versus the $150,000 net income at the proprietorship level)-4,000
Cash cost (after taxes) for extra S corporation tax returns, annual filings with the state, and lawyer’s fees-2,000
After-tax cash lost with the S corporation medical plan versus the benefits of the Section 105 plan at the proprietorship level-3,000
Net cash to spend with S corporation$92,000
Step 3: Cash advantage to proprietorship$9,000

You may or may not be able to make the comparison yourself. If not, spend money with your tax advisor to get this comparison in writing.

Take the example computation above. Say the business owner was told he could save $6,000 on self­ employment taxes by becoming an S corporation. That statement is true. But considering all the tax advantages and disadvantages, the S corporation is the wrong entity for this business owner. The existing proprietorship gives the business owner a $9,000 advantage over the S corporation.

The big mistake is not seeing a big-picture, pencil-to-paper comparison of tax benefits.

Sad But True Story

Thousands of taxpayers form S corporations without any idea of the bottom-line results. Here’s a sad but true story. We changed the names to protect the guilty.

At a lively cocktail party, Henry Smith asked his accountant, Jane Ford, if he should become an S corporation. She said yes, retired, and moved to Florida. Meanwhile, Mr. Smith changed his letterhead, business name, etc., and became Henry Smith, Inc. He selected S corporation status and hired a new accountant to replace the retired Ms. Ford. He learned that his new S corporation did not reduce his taxes as he expected. Instead, S corporation status increased his taxes by $13,000.

Mr. Smith was most unhappy.

Mr. Smith’s $13,000 in lost money to taxes was only part of what he lost. He spent many hours getting his credentials, letterhead, business ads, etc., converted to the corporate form, not to mention the money and time he spent incorporating, changing his bank accounts, etc.

Don’t make the big mistake Henry Smith made. Beware of answers you obtain at lively cocktail parties. See a physical comparison of your entity numbers before making a decision!

Need for Liability Protection

Say the deliveryman slips and falls on a banana peel left on the doorstep of your business location-which might be inside your home. Your personal assets could be at risk when he decides to sue for his disabling back injury.

How do you protect your personal assets? You could operate your business as an entity that limits your liability to the assets of your business.

The entity choices include S and C corporations and LLCs. Each of these entities forms a protective legal wall around your personal assets. Since most business-related liabilities can’t penetrate that wall, your personal assets should be safe from the deliveryman’s assault on your wealth.

No Liability Protection Here

You need one more bit of global knowledge about liabilities. In general, no liability-limiting entity can protect your personal assets from your

  • professional errors and omissions or
  • tortious acts (such as the reckless operation of an auto resulting in injuries to others and/or property damage).

To protect your assets from exposure to professional and tort liabilities, you must conduct your business and personal life with due diligence and buy adequate insurance coverage. No surprises here!

Professional Corporations

In many states, accountants, engineers, lawyers, medical professionals, and many others must form a professional corporation or professional LLC. The professionals generally remain personally liable for personal malpractice, negligence, and other professional acts.

From a tax standpoint, professional corporations and LLCs operate as corporations and LLCs, with one major exception. The professional C corporation has only one tax bracket, the top corporate bracket of 35 percent. As part of this series of articles, we will discuss the professional C corporation in more detail.

Big-Picture Comparison of Tax Benefits

We selected the tax attributes in the table below so you can compare the four entities that you are most likely to choose from:

Choice of Entity-Table 1: Income and Payroll Taxes for the One-Owner Business

Big-Picture Comparison of Other Attributes

Besides the income tax attributes above, you likely want to consider the attributes in the chart below.

What’s Next?

You are unlikely to identify a business entity that has all advantages for you and no disadvantages.

Make sure you see your choice of entity in a comparison that shows you the after-tax cash from your choices. If you need to engage your tax advisor to make this comparison for you, consider this a good expenditure of money to ensure that your business operates the right way.

You also need a periodic checkup because tax laws change, as does your personal situation.

There are tax deductions specific to small business

How do you avoid losing money by making the wrong choice?


Here’s one way to see the issue: Say you have seven employees who now work at least two days a week from home because of COVID-19. To facilitate this working at both the office and the home, you purchased seven laptop computers at a cost of $2,179 each.
You have five choices for deducting the computers:

  1. De minimis expensing
  2. Bonus depreciation
  3. Section 179 expensing
  4. Modified accelerated cost recovery system (MACRS) depreciation
  5. Straight-line depreciation

You have four things to consider:

  1. What is the maximum you can deduct this year, and what if you want to deduct less?
  2. How does this affect your Section 199A deduction if you operate as a proprietorship, a partnership, or an S corporation? (C corporations don’t qualify for the Section 199A deduction. If you operate as an LLC, you are one of the four taxable entities just mentioned.)
  3. If you file as a proprietorship on Schedule C of your Form 1040, is there a self-employment tax issue when you sell the computers?
  4. How does your choice affect your local, county, and state personal property taxes?

Let’s get started.

Deduction. With de minimis expensing, you deduct $15,253 ($2,179 x 7) if the invoice shows the seven computers, as explained in Act Now! Get Your 2018 Exgensing in Place.

The de minimis safe harbor expensing does not allow you to control your deduction. With this method, you deduct $15,253.


When using de minimis expensing, the computers do not show up as assets on your books of account. Think of them as pencils and paper that you expense as office supplies.


Reminder. The de minimis safe harbor allows you to elect immediate expensing of small-asset purchases, provided that 1

■ the asset costs $2,500 or less ($5,000 if the business has an applicable financial statement),
■ you reflect the asset cost as an expense on your company’s books of account, and
■ your financial accounting procedures follow the same expensing method you use for federal tax purposes.

Section 199A. With de minimis expensing, the computers are not assets in your books of account, so they do not count as assets for the Section 199A deduction. But it’s likely they were not going to do much, if anything, for your Section 199A deduction anyway.


Self-employment tax. If you operate as a proprietorship or an LLC taxed as a proprietorship-and you sell the computers for, say, $4,300-you report $4,300 as ordinary income but face no self-employment tax on the gain. 2


Personal property taxes. The assessment of property taxes by local, county, and state governments varies widely. Some jurisdictions look to the business’s income tax returns for the property that is subject to property taxes.


De minimis expensing removes the expensed property from the tax returns. If your business is taxed based on the property listed on your federal income tax return, de minimis expensing reduces your personal property taxes.

If you don’t expense the computers using the de minimis safe harbor, you must elect out of 100 percent bonus depreciation if you don’t want to use it, as we explain in If You Don’t Want 100 Percent Deweciation, Elect Out or Else.


Pay attention here. The required bonus depreciation applies on a class-by-class basis to all assets in the class if the class is eligible for bonus depreciation.
But for simplicity here, let’s say that the only assets you purchased this year in the five-year class are the seven computers. With bonus depreciation, your deduction is $15,253.


Section 199A. Property for which you use bonus depreciation adds to your qualified property and can add to your Section 199A tax deduction.


Self-employment tax. If you operate as a proprietorship or an LLC taxed as a proprietorship-and you sell the computers for, say, $4,300-you report $4,300 as ordinary income but face no self-employment tax on the gain. 3


Personal property taxes. If the assessment of your personal property taxes is based on your business’s income tax returns, the assets for which you claimed bonus depreciation show up and could increase your personal property taxes.

Deduction. Section 179 expensing applies before bonus depreciation, so you could use it to expense all the $15,253. But if you want to use Section 179 for a lesser amount-say, $5,000-then you need to elect out of bonus depreciation, or you will have inadvertently expensed the entire $15,253 ($5,000 under Section 179 and $10,253 in bonus depreciation).4


Example. To use Section 179 to expense $5,000 and then depreciate the remainder using either MACRS or straight-line depreciation, you need to first elect Section 179 for $5,000 and then elect out of bonus depreciation.


Section 199A. Property for which you use Section 179 expensing adds to your qualified property and can add to your Section 199A tax deduction.

Self-employment tax. When the business use of Section 179 property drops to 50 percent or less before its depreciable period expires, you trigger Section 179 recapture. And that recapture income triggers the self­employment tax for the Schedule C taxpayer and a partner in a partnership. 5

When you sell a Section 179 asset, your gain or loss does not affect your self-employment taxes.


Personal property taxes. If the assessment of your personal property taxes is based on your business’s income tax returns, the assets for which you claimed Section 179 expensing and/or depreciation show up ( often in a supporting schedule) and could increase your personal property taxes.

If you elect out of bonus depreciation and don’t otherwise expense the computers, you will depreciate the $15,253 using a five-year depreciation table (which, because this is tax law, takes six years). You have two choices for the pace of the depreciation-straight-line or MACRS-as you can see in the table below.

Section 199A. The computers you depreciate add to your qualified property and can add to your Section 199A tax deduction.

Self-employment tax. If you operate as a proprietorship or an LLC taxed as a proprietorship-and you sell the computers at a gain of $4,300-you report $4,300 as ordinary income but face no self-employment tax on the
gain.6

Personal property taxes. If the assessment of your personal property taxes is based on your business’s income tax returns, the assets you depreciate show up (often in a supporting schedule) and could increase your personal property taxes.

While straight-line depreciation is the simplest method of all, it may not provide the best tax deductions. The calculation is made by dividing the cost of the asset by its useful life. For example, the computers we purchased for $15,253 is divided by their useful life of 5 years or 60 months. The result is $2,542.17 per month. If these computers were purchased during the year, the first year’s depreciation expense would be the number of months owned multiplied by $2,542.17.

To run a business successfully, you must have an adequate bookkeeping system in place. You need to know what is happening on a financial level, and bookkeeping allows you to keep track of this. If you fail to monitor and analyze your financial activities, you could prevent your business from reaching its full potential.

This guide will explain:

To help you understand the importance of bookkeeping in a small business, you first need to understand what it is.

Bookkeeping is the recording of all the incoming and outgoing financial transactions (or cash flow) associated with your business. You track all your financial transactions, including the money you make from sales (revenue) and what you spend on expenses like materials, bills, or loan repayments.

Before the world became digital, bookkeeping used to be a slow and tedious task that involved physically writing down all transactions in a ledger. Currently, cloud-based technology automates many aspects involved in bookkeeping, making the process much faster and simpler.

It is impossible to run any business for long without a reasonable understanding of its finances. Bookkeeping ensures you have the necessary funds and information to satisfy your financial obligations, such as expenses and taxes.

Small businesses must pay several different taxes throughout the year, including Income Tax, Dividends Tax, and Corporation Tax. Bookkeeping is crucial when calculating how much you owe to HMRC.

Anyone who is self-employed or runs a limited company needs to file a Self-Assessment tax return every year to declare their earnings to HMRC. You must keep your bookkeeping organized to avoid submitting incorrect information.

The Countingup app has a built-in tax estimation tool that allows you to stay informed about your taxes at all times, so you can estimate how much you need to set aside.

Effective bookkeeping also helps you make more tax-efficient decisions about how you pay yourself (dividends vs salary), what business structure is right for you (sole trader or limited company), and whether you should register for VAT.

Are you still unconvinced about the importance of bookkeeping to a small business? Here are a few benefits that good bookkeeping practices will bring to your business:

Failure to keep your bookkeeping in good order causes last-minute stress as you scramble to locate the documents you need to claim expenses or pay your taxes before deadlines pass.

By staying on top of your bookkeeping, you will create organised records that save you time and avoid stress further down the line. Countingup allows you to log transactions, capture receipts, and generate invoices, thereby helping you organise your bookkeeping in an easy-to-use app.

Budgeting is important in any business because it enables you to plan for future expenses and investments. Adopting this strategy can help your company grow. Bookkeeping makes it easier to budget because it allows you to create a map of how much money you have available at any given time.

Having clear numbers to analyze also helps you plan how to achieve your business goals.

As mentioned above, all business owners must file their taxes at the end of each tax year. Having an efficient bookkeeping process in place means you have the financial information you have the information you need already prepared when you file your Self-Assessment tax returns. Moreover, bookkeeping allows you to predict your tax liability.

Using accounting software to do your bookkeeping will also help you with the Making Tax Digital (or MTD) system, which the government introduced in April 2019. Currently, MTD only applies to VAT-registered companies. However, in due course, you will need to conduct all your business accounting online.

Whether you are a new business owner or have been running your own company for years, bookkeeping offers you plenty of opportunities to learn about how your business operates. By letting you know where you usually make your money or how quickly your customers pay, bookkeeping offers valuable information that you can use to improve your business performance.

You can discover which customers always pay you late and decide whether you need to implement stricter invoice payment terms. The more you know about your finances, the smarter your business decisions can become.

As a business owner, the last thing you need is worries about lost receipts or missed tax deadlines. Staying on top of your bookkeeping means you can rest easy knowing that your financial records are ready to be reviewed should HMRC come knocking.

As you incorporate bookkeeping into your daily routine, you will become quicker and more adept at logging your transactions. If you use an app like Countingup to capture receipts and manage your finances, you will save time that can be dedicated to more productive tasks.

We love Cheqbook. The system of categorization of transactions is unique and far superior to any other accounting program on the internet. The fee for Cheqbook is a fraction of what QuickBooks costs. To learn more, click HERE.