An Overview of Dealing with Business Taxes

This article is intended to provide general information only and should not be construed as giving tax advice or guidance. The publisher does not act as a tax adviser of any kind. All answers to tax questions requiring legal clarification should be sought from a licensed, qualified professional.
Types of Organization

There are four forms of business organization according to tax status: sole proprietorship, partnership, corporation, and nonprofit. Some require incorporation, which is regulated on a state level, in order to qualify for advantageous tax treatment. A corporation must abide by the laws of the state where its articles of incorporation are filed, even if it is not headquartered in that state. Incorporating a company accomplishes two major goals: 1) it establishes a separate taxable entity, thereby allowing a majority of income to be taxed at a corporate rate rather than taxed as personal income; and 2) incorporating provides certain protections against personal liability of the owners. A corporation is recognized as its own entity; therefore, a corporation can enter into contracts on behalf of an owner, and the owner, or stockholder, assumes no personal responsibility for its debts and obligations. Personal losses from corporate failure are limited to the shareholder's investment amount; on the other side, personal assets may be owned by the corporation and protected in the event of a personal lawsuit.

A sole proprietorship is an unincorporated business that has one owner who is totally liable and personally suffers unlimited loss in the event of legal action. Most often the form used by consultants, freelancers, and artists, proprietorships are not heavily regulated in most professions. The company may have employees, which requires an employer identification number (EIN) for tax purposes, but the owner assumes personal responsibility for the work done by employees.

A partnership can be incorporated or not and can have many structures. The only requirement is that there are two or more partners. How you structure this type of organization will depend on how profit will be shared, how taxes will be reported, and who will assume liability for the company's business. There are a few standard forms that many partnerships organize under:
  • General partnership: All partners share rights and responsibilities, and each assumes personal liability for obligations and debts. One partner can enter into agreements of behalf of all the partners. Profits and losses are divided among the partners and taxed as individual income.
  • Limited partnership: There is one general partner and other limited partners. The general partner assumes full responsibility for debts and obligations; likewise, the general partner has management and decision-making authority. The limited partners risk loss only of their investment, whereas the general partner risks full personal loss. The partners share in profits and losses, with unincorporated partnerships being taxed as personal income.
  • Limited Liability Partnership (LLP) / Limited Liability Limited Partnership (LLLP): Some states offer these structures, which are similar in almost all respects to the other partnership forms with one key difference: Partners cannot be liable for the wrongful actions of other partners. In some cases, the general partner cannot be held responsible for the company debts and obligations.
A corporation is a separate entity that continues to exist as owners come and go. It can comprise one person or many shareholders, who are issued stock that shows an ownership interest. Large organizations are typically headed by a board of directors, who direct the management decisions of the company. Owners enjoy limited liability for wrongful acts because the corporation is seen as a separate entity. Additionally, the corporation determines how profits are distributed and can claim losses for tax purposes over unlimited years. There are three primary corporation forms:
  • The most common type in the U.S. is the C-corporation. This form can have unlimited shareholders who typically vote periodically on major company decisions. The board of directors is limited and is more closely involved in decision-making. Owners are paid dividends as income, while both the corporation and owners are taxed separately.
  • A close corporation is typically limited to less than 30 shareholders who can all participate in management decisions. Taxed similarly to a C-corporation, shareholders are paid through dividends. Transfer of ownership is closely controlled, many times requiring the approval of total ownership.
  • An S-corporation provides a structure that has limited shareholders, fewer than 100, and enjoys special tax status apart from typical corporations. It has the same basic rights, privileges, and obligations as C-corporations. Again, shareholders receive dividends as income, unless a shareholder is performing operational activities for the company.

A nonprofit organization is afforded a special tax exempt status in the U.S. and can receive funding from the government. As the name implies, the company is not in business to earn a profit; it exists to provide important services and functions for the community at large. Some are designated as charitable organizations, while others are involved in health care, arts, social, and humanitarian support, education, research, religion, and animal and environmental protection. Many nonprofits issue memberships for participants and rely on volunteers to perform activities. Members vote for a board of directors, board of governors or board of trustees who provide leadership for the organization. No stock is issued or dividends paid; however, the business can hire employees and pays its directors a reasonable income.

All businesses, including nonprofits, pay taxes on various aspects of company activities. As discussed, sole proprietorships and many partnerships are taxed differently from corporations; however, all businesses are required to pay taxes on income. The Internal Revenue Service (IRS) oversees taxation policies and procedures in the United States. Most tax transactions can be conducted over the Internet, and the sole proprieter or a partner in smaller companies can prepare the paperwork. However, because of increased complexity, corporatons and larger businesses typically seek tax preparation services from independent accountants or in-house accounting personnel.

Income taxes

A taxable entity is required to estimate its income and submit estimated tax payments. Estimated tax payments are paid periodically for businesses expecting to owe at least $1,000 in income taxes for the period, according to the 2008 tax codes. Small, non-corporate entities must also pay self-employment taxes, which go to Social Security and Medicare programs. Corporate shareholders pay personal taxes for any dividends they receive, but corporate earnings are taxed at a corporate rate. T
his means corporation revenues can receive double taxation status. Income from non-operational activities, such as interest earned or dividends received from investments, are taxed as earned income but are allowed deductions and other tax offsets.
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Capital Gains and Losses

Businesses can have gains and losses from the sale of capital equipment, real estate, or other large holdings. In proprietorships, partnerships, close and S-corporations, those gains and losses are "passed through" to owners, but C-corporations can adjust only corporate earnings to accommodate the transaction. Gains and losses are considered short-term (an asset held less than one year) or long-term (assets held longer than one year). Assets can be real property, stocks, and bonds or intangible property, such as goodwill, patents, or copyrights.

Tangible items the company possesses are considered assets for tax purposes. Land, buildings, equipment, supplies, and inventory are all taxed based on the accounting method the manager chooses to use:

1. Cost method: Property is valued by the cost to acquire, produce, and hold the asset.
2. Market method: Property is valued at the market price to replace the asset.

GAAP accounting rules typically require recording assets at the lower of cost or market method. Valuations for capital assets, such as equipment, allow for deductions for depreciation, depletion, amortization, or other loss from the continual use of these resources.


Employers are required to withhold federal taxes from employees each pay period. Those deductions are then matched by the employer's contribution and paid on a periodic basis. Taxes are paid on compensation, which includes wages, benefits, bonuses, assistance programs, awards, and other forms of tangible or intangible payments to employees. Subcontractors and other non-employee workers are taxed through a different process, as these types are responsible for their own tax preparation and payment.

Business expenses, both operational and non-operational, are typically deductible against income when filing tax returns. In order to qualify, the expense must be considered "ordinary and necessary" and reflect a business use. Capital assets, such as buildings and equipment, typically do not qualify for expense deduction; these are seen as investment in the business. The cost of selling goods can be deductible as an expense if the costs have not already been deducted from income.

Because of the complexity and changing requirements of taxation, most experts recommend consulting or employing a trained tax professional to prepare and submit tax forms. There are tax advantages and disadvantages for a variety of business functions, organizational structures, and commercial activities. Managers handling overseas transactions operate under several additional tax codes and multinational corporations are held to different taxation standards as well.
Filling a Customer Order

Once a customer places an order, what happens? A process called fulfillment is performed. This term refers to all steps from the time the purchase is input into a system to completion of the buyer's request. More complex offerings, such as manufacturing, distribution, and construction orders, flow through a system made up of several steps. Some transactions, such as purchasing groceries, require only a few steps to complete.

Some experts describe the process as including the point of sale request by the purchaser. A staff member then records the order and collects compensation, unless the transaction is billable, in which case the customer makes arrangements to pay for the purchase later. Then the requested activity is performed or a good is delivered. Smaller companies may be able to complete the order with only one or two people involved. Sometimes fulfillment may require assembling, packaging, and transportation. There are fulfillment houses that manage order execution and delivery and may even provide storage for your inventory.

If you manage a manufacturing facility, order fulfillment involves the building of the products for sale. Though larger companies separate the assembly and order fulfillment functions, the entire process is generally considered by management consultants to be an act of fulfilling the customer's request. Fulfillment management is sometimes considered supply chain management , or controlling a flow of resources from the point of origin to point of consumption. There are essentially four build-to-completion fulfillment processes:
  • Engineer to Order (ETO): The product is both designed and built to specific customer requirements. Activities like home construction and specialty automobile assembly typically follow this method. ETO customization can be fully or partially automated using computer- aided design (CAD) software.
  • Build to Order (BTO) / Make to Order (MTO): A standard design is followed, but production changes can be made to fit customer specifications. The process produces the components and builds a final product from those components. Larger items like aircraft are made in this way.
  • Assemble to Order (ATO): In this method, a final product is built from existing components. A modular design assembly brings a few parts together to make a finished product. This method typically uses an assembly line production and fulfillment process.
  • Build to Forecast (BTF): Production to meet forecasted inventory levels, this method fulfills orders from existing stock. Stock is replenished on a routine basis, and the good is available only in limited designs.

Service industries have their own fulfillment procedures. Because services can be more easily specialized, one of the keys to successful service fulfillment occurs at the front line or point of sale. This is where a purchase request takes place. Clearly defined service options and pricing structures enable the buyer to understand what to expect and what it will cost. If the offering is a standardized service, such as a car wash, simply describing options and pricing will be adequate; but services that have variability, as in home remodeling, for example, will require getting a clear understanding of what the customer wants, the steps required to accomplish the task, the anticipated time frame for completion, and the total cost of the project. Many times a company's fulfillment process is judged on a combination of product and service delivery. For instance, food service companies (i.e. restaurants, take-out stands) are measured by how well the items taste and how efficiently they are served.

Steps in Fulfillment
Whether you are managing the shipment of products or the delivery of a service, there are typically at least a few steps taken to complete a sale. Fulfillment managers look to create the most efficient and effective processes to respond to a customer's request. Many times the process involves more than one facility, one department, or one procedure to complete the transaction. How well a company manages and executes order fulfillment is critical to its long-term survival. Here are some typical steps involved in fulfillment activities:

1. Product inquiry: Starts with a prospective customer showing interest in your offering. This could occur by a visit to a store or Web site, ordering through a catalog or mail piece, or calling a representative to order.

2. Sales quote: The customer is made aware of the offering cost and availability. This can occur at the time of product inquiry via a menu or a listing of products on which prices are displayed (e.g., e-commerce Web site).

3. Order configuration: When options are available, coordinating the assembly of the final product or the selection of features takes place.

4. Order booking: The request is entered into a data confirmation or transaction system, including customer details and delivery destination.

5. Order confirmation: This involves confirming the order placement and/or booking and sometimes produces a purchase order, invoice, or receipt.

6. Order sourcing: The manager plans for the release of the requested items or choice of employees to perform services. For products, a stock- keeping unit (SKU) is used for inventory location. For services, sourcing requires personnel scheduling.

7. Change order: This occurs when a change is made after the initial order is booked and sometimes involves cancellation of the original order.

8. Shipment release: A storage facility is given the order request and begins the shipment process. The pick-and-pack procedure takes a product from inventory and packs it for shipment. Inventory workers use the SKU to locate the item; case picking from pallets is done for orders of multiple copies.

9. Shipment: Here the coordination of transportation takes place, including notification of shipper, the pickup and release of goods for shipment, and the mode of delivery.

10 Delivery: The product is received by the consignee, which is the customer. This process includes tracking package movement or personnel location.

11. Invoicing: The customer is presented with the bill for payment. This can occur immediately or on a delayed basis and may include repeat invoicing for unpaid bills. The invoice amount should match the price quote delivered earlier in the fulfillment process.

12. Settlement: As the payment for charges is received, it is entered into the accounting system and reconciled against outstanding invoices.

13. Returns: If goods or service is unacceptable, a process is in place for returns, discounts, allowances, or reissue. This activity involves appropriate system entry to avoid duplications and improper invoice reissuance.

14. Customer support: Some workers are employed solely to assist the customer following delivery. This may include repair personnel, online assistance, or technical experts.

Throughout the entire process, the manager monitors logistics, or the flow between the points of origin and delivery. This requires having "the right product in the right amount at the right time" to satisfy purchase requests. The manager must coordinate the front line with the back end so the entire customer demand is met.

E-commerce sites provide a method for a sales product inquiry, order placement, confirmation, booking, sourcing, and invoicing through the Internet. The order is then processed using an automated system that sends orders to the back end, which typically is a fulfillment house. Customers' ease of purchase and the expansive market potential make an online presence an attractive fulfillment option to many retailers.
Customer Relationships
Business managers agree that establishing a long-term relationship with your customers is the best strategy for success. It is generally accepted that it takes much more energy and resources to acquire a new customer than it does to retain a satisfied one. Because of that fundamental theory, fulfillment is an important element of customer relationship management (CRM). The CRM function coordinates all the elements responsible for shaping the customers' experiences with the company. This can include order processing, marketing, finance, information technology, and even facilities management, all brought together to enhance the experiences, products, and services the customer receives. Generating sales, targeting marketing opportunities, improving operational functions, and increasing customer retention are the main objectives of customer relationship management.

Communication, both internal and external, is essential for executing an efficient and effective fulfillment function. From sharing customer experiences to delivering updates on products, communication channels should be open at all times. Many companies use business software designed to integrate different functions and share information among departments. This streamlines the fulfillment process, as an order can be input and instantly received miles away by accounting and distribution employees. Frontline personnel, considered the "face" of the company, are critical to the fulfillment process because these employees have a high level of customer contact. The information they share throughout the company should be accurate and clear because it affects other functions during the fulfillment process. From taking the order to answering questions, these employees are trained to respond to requests.
With the complexity of some products, technical support provides an important function in the customer experience. When a piece of equipment fails or a computer software program does not operate properly, buyers usually want to contact someone with technical knowledge of the product to assist in repairing the problem. Multiline businesses may either have specialized personnel trained in a single product line or one area of support for several products.