More than half a million Americans file paperwork to start a business every single month — the Census Bureau counted over 4.3 million new business applications in just the first eight months of 2026. Most of those founders obsess over the fun parts: the name, the logo, the first customer. Far fewer set up the unglamorous federal-tax foundation that decides whether year one runs smoothly or becomes a scramble of penalties, missed elections, and reconstructed records.
The good news is that the IRS publishes exactly what it expects from you, in plain language, on its "Starting a business" and "Checklist for starting a business" pages. This guide walks through that federal checklist step by step — choosing a structure, getting an EIN, picking a tax year, setting up recordkeeping, understanding your business taxes, handling your first hires, and considering a retirement plan — so you can get every foundational decision right the first time.
1. Choose a Business Structure Before Anything Else
Your business structure determines how much paperwork you file, how you pay yourself, how the business is taxed, and whether your personal assets are on the line if something goes wrong. The IRS recognizes five common forms, and the right choice depends on your liability exposure, tax situation, and appetite for administration:
- Sole proprietorship. You and the business are the same entity for tax purposes. There is no separate return — you report profit and loss on Schedule C of your personal Form 1040. Simple and free, but your personal assets have no liability shield.
- Partnership. Two or more owners share profits, losses, and management. The partnership files an information return (Form 1065), and each partner pays tax on their share via Schedule K-1. Like a sole proprietorship, a general partnership offers no liability protection.
- Limited liability company (LLC). Created under state law, an LLC shields owners' personal assets while defaulting to pass-through taxation — a single-member LLC is taxed like a sole proprietorship, a multi-member LLC like a partnership. You can also elect to be taxed as an S corporation or C corporation later.
- S corporation. A pass-through entity that lets owners take part of their income as distributions rather than salary, which can reduce self-employment tax — but the IRS requires owner-employees to pay themselves reasonable compensation first, and ownership rules are strict (US individuals only, 100-shareholder cap, one class of stock).
- C corporation. A separate legal and tax entity that pays its own income tax (currently a flat 21% federal rate). It offers the strongest liability protection and the most flexibility for raising capital, at the cost of double taxation when profits are distributed as dividends.
How to Decide
If you are a solo freelancer with no employees and minimal liability risk, a sole proprietorship or single-member LLC is usually enough to start. If you have co-founders, outside investors, or meaningful liability exposure — you sell physical products, give professional advice, or sign commercial leases — form an LLC or corporation before you take your first dollar of revenue. And remember that structure is not permanent: many businesses start as LLCs and elect S corporation status once profits make the payroll-tax savings worth the extra administration.
A common mistake is forming an entity with your state and assuming the tax side is handled. It is not. Your state filing creates the legal entity; you still need to tell the IRS how you want to be taxed, get an EIN, and set up your books — which brings us to the next steps.
2. Get an Employer Identification Number (EIN)
An EIN is a free nine-digit federal tax ID the IRS issues to identify your business, much like a Social Security number identifies you. You need one if you have employees, operate as a corporation or partnership, file employment or excise tax returns, or maintain certain retirement plans. Even if you are a sole proprietorship with no employees — technically allowed to use your Social Security number — getting an EIN is still smart: banks usually require one to open a business account, and using it on invoices and W-9 forms keeps your Social Security number out of circulation.
The application takes minutes. Apply online directly through the IRS website — the EIN assistant issues your number immediately upon validation, at no cost. Two warnings: the online application is only available during IRS operating hours, and third-party sites that charge a fee to "obtain" your EIN are selling you something the IRS gives away. Never pay for an EIN.
3. Pick a Tax Year
A tax year is the 12-month period your business uses for accounting and tax purposes, and the IRS wants you to adopt one deliberately rather than stumble into it. Your two options:
- Calendar year — January 1 through December 31. This is the default most small businesses use, and if you operate as a sole proprietorship, partnership, single-member LLC, or S corporation, you generally must use it unless you can demonstrate a business purpose for something else.
- Fiscal year — any 12 consecutive months ending on the last day of a month other than December, such as July 1 through June 30. Seasonal businesses sometimes prefer this: a retailer whose slow season ends in January, for example, closes its books when things are quiet instead of mid-holiday-rush.
Why does this matter on day one? Because changing your tax year later generally requires IRS approval on Form 1128, with a user fee and a waiting period. For most new businesses, the practical advice is simple: adopt the calendar year unless you have a specific seasonal reason not to, and note the choice in your records — your first tax return will lock it in.
4. Set Up Recordkeeping From Day One
This is the step founders skip most often and regret most deeply. The IRS requires every business to keep records that support the income, deductions, and credits claimed on its returns — gross receipts, purchases and inventory, travel and entertainment, assets, and employment taxes — and to keep them available for inspection. IRS Publication 583 is the full guide, but the practical requirements are straightforward:
- Separate business from personal immediately. Open a dedicated business bank account before your first sale, and run every business transaction through it. Commingling funds is the fastest way to lose deductions you deserved and to pierce the liability shield you formed an LLC to get.
- Capture receipts at the moment of spending. Photograph or forward every receipt the day it happens, tagged with what it was for and which client or project it served. A shoebox of faded thermal paper is not a recordkeeping system.
- Track the categories the IRS actually asks about. Gross receipts, cost of goods sold, asset purchases with dates and costs, mileage logs with business purpose, and payroll records each have their own substantiation rules. A chart of accounts designed around these categories makes tax time a report, not an excavation.
- Keep everything long enough. The general rule is at least three years from the date you file a return or its due date, whichever is later; employment tax records must be kept at least four years. If you underreport income by more than 25%, the window stretches to six years — another reason accurate books beat optimistic ones.
Accurate bookkeeping from day one prevents tax headaches later in the most literal sense: every deduction you claim needs a paper trail, and a trail you build daily costs minutes while a trail you reconstruct in April costs weekends — or your accountant's hourly rate. If you want your records in a format you fully own and can diff, back up, and audit like source code, plain-text accounting (see the Beancount documentation for the concepts) gives you a ledger that is transparent by construction rather than by export.
5. Know Which Business Taxes Apply to You
New owners are often surprised by how many distinct taxes a small business can owe. The IRS groups them into four families, and you should know on day one which ones touch you:
- Income tax. Everyone pays this. Pass-through owners (sole proprietors, partners, LLC members, S corporation shareholders) report business profit on their personal returns and pay at individual rates; C corporations pay the 21% corporate rate on Form 1120.
- Self-employment tax. If your net self-employment earnings reach $400 or more, you owe Social Security and Medicare tax on them — currently 15.3% on top of income tax. This is the bill that blindsides new freelancers who budgeted only for income tax.
- Employment taxes. The moment you hire employees, you withhold federal income tax plus Social Security and Medicare from their wages, pay the matching employer share, and file quarterly payroll returns (Form 941) plus annual unemployment tax (Form 940).
- Excise taxes. These apply only to specific goods, services, and activities — fuel, tobacco, indoor tanning, certain manufacturing. Most service businesses never touch them, but check the list if you make or move physical products.
Pay-as-You-Go: Estimated Taxes
Employees have tax withheld from every paycheck; when you work for yourself, nobody withholds anything, so the IRS expects you to send in quarterly estimated payments on Form 1040-ES. If you expect to owe $1,000 or more for the year, skip the quarters and you will owe an underpayment penalty plus interest even if you pay in full by April. A practical rule for your first profitable year: set aside 25–30% of every payment you receive in a separate savings account the day it arrives, then send a quarter of it to the IRS each quarter. You will never spend tax money by accident again.
6. If You Are Hiring: I-9s, W-4s, and Withholding
Hiring your first employee triggers a second checklist inside the first one. Before their first paycheck, each new hire must complete Form I-9 (employment eligibility verification) and Form W-4 (withholding certificate). You verify the I-9 documents, keep the form on file, and use the W-4 to calculate withholding.
Beyond the forms, hiring means registering for payroll taxes: withholding federal (and usually state) income tax, paying and reporting employment taxes quarterly, furnishing W-2s each January, and carrying workers' compensation insurance as your state requires. Many first-time employers outsource this to a payroll provider — a reasonable choice — but understand that the legal responsibility for correct withholding and timely deposits stays with you. Payroll tax debt is one of the few business liabilities the IRS can assess against owners personally, so treat every deposit deadline as sacred.
7. Consider a Retirement Plan While You Are Small
Retirement planning feels premature when you have no revenue, but the IRS lists it on the starting-a-business page for a reason: the plans with the biggest tax deductions for owners are cheapest to set up before you have employees. Three options dominate for small businesses:
- Solo 401(k). For owner-only businesses with no employees (a spouse can participate). You contribute both as employee (elective deferrals up to $24,500 for 2026) and as employer (up to 25% of compensation), with a combined ceiling of $72,000 — plus an $8,000 catch-up if you are 50 or older. At most income levels this allows larger deductible contributions than any other small-business plan.
- SEP IRA. The simplest option: the employer contributes up to 25% of compensation (20% of net self-employment earnings), capped at the same $72,000 ceiling for 2026. Setup is a single form with no annual filing, but you must contribute the same percentage for eligible employees — which gets expensive fast once you hire.
- SIMPLE IRA. Designed for businesses with 100 or fewer employees. Workers defer up to $17,000 for 2026, and the employer either matches up to 3% of pay or contributes a flat 2% for everyone. Lower ceilings than the options above, but far less administration than a full 401(k).
The day-one takeaway: if you expect to stay owner-only for a while, a Solo 401(k) usually shelters the most income; if you plan to hire soon, compare the mandatory employer contributions before you commit, because switching plans mid-stream costs time and paperwork. Either way, open the account in a profitable year — contributions for SEP IRAs can be made up until your filing deadline, so even a strong fourth quarter can still fund a deduction.
8. Do Not Forget State Requirements — and Check FinCEN
The IRS checklist covers federal taxes only, and it says so explicitly: every state adds its own layer of business licenses, sales tax registration, unemployment insurance, and annual reports. The IRS page links out to state government websites, and the Small Business Administration's "10 steps to start your business" guide is the best single complement to the federal checklist — it covers market research, business plans, funding, and location, the non-tax half of starting up.
One federal-adjacent item deserves a callout: the IRS also points new owners to the Financial Crimes Enforcement Network (FinCEN) for beneficial-ownership reporting rules. Requirements in this area have shifted over time, so check the current FinCEN guidance for your entity type rather than relying on secondhand summaries.
Your First-90-Days Timeline
Checklists only work if they turn into a schedule. Here is one way to sequence the federal items:
- Week 1: Choose your structure, file any state formation paperwork, and apply for your EIN online.
- Weeks 2–3: Open a business bank account with your EIN, adopt your tax year and accounting method in writing, and set up your bookkeeping system with a real chart of accounts.
- Month 1: If hiring, collect I-9s and W-4s, register for payroll taxes, and run your first compliant payroll. Set up your estimated-tax savings habit from the first payment you receive.
- Months 2–3: Review whether your structure still fits now that revenue is real, open a retirement plan if the year's profits justify it, and confirm your state licenses and sales-tax registrations are complete.
Work through that timeline and you will have satisfied every item on the IRS starting-a-business checklist — structure selected, EIN in hand, tax year adopted, records flowing, taxes understood, hires documented, retirement considered — before your first quarter even closes.
Keep Your New Business's Books Clean From Day One
Starting a business means making a dozen foundational decisions in a few weeks, and recordkeeping is the one that compounds: clean books make every future tax return, loan application, and investor conversation easier, while messy ones charge interest in the form of stress and accountant fees. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in — and you can visualize it all with Fava. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
