Starting a tax business can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful tax business.
Importantly, a critical step in starting a tax business is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.
14 Steps To Start a Tax Business:
- Choose the Name for Your Tax Business
- Develop Your Tax Business Plan
- Choose the Legal Structure for Your Tax Business
- Secure Startup Funding for Your Tax Business (If Needed)
- Secure a Location for Your Business
- Register Your Tax Business with the IRS
- Open a Business Bank Account
- Get a Business Credit Card
- Get the Required Business Licenses and Permits
- Get Business Insurance for Your Tax Business
- Buy or Lease the Right Tax Business Equipment
- Develop Your Tax Business Marketing Materials
- Purchase and Setup the Software Needed to Run Your Tax Business
- Open for Business
1. Choose the Name for Your Tax Business
The first step to starting a tax business is to choose your business’ name.
This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your own tax preparation business:
- Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check to see if a suitable domain name is available.
- Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
- Think about marketing. Come up with a name that reflects the desired brand and/or focus of your new business.
2. Develop Your Tax Business Plan
One of the most important steps in starting a tax preparation business is to develop your business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise capital for your business.
Your business plan should include the following sections:
- Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your tax business.
- Company Overview – this section tells the reader about the history of your tax business and what type of tax business you operate. For example, are you an tax accounting firm, a tax consulting firm, or a tax software company?
- Industry Analysis – here you will document key information about the tax industry. Conduct market research and document how big the industry is and what trends are affecting it.
- Customer Analysis – in this section, you will document who your ideal or target customers are and their demographics. For example, how old are they? Where do they live? What do they find important when purchasing services like the ones you will offer?
- Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
- Marketing Plan – your marketing plan should address the 4Ps: Product, Price, Promotions and Place.
- Product: Determine and document what products/services you will offer
- Prices: Document the prices of your products/services
- Place: Where will your business be located and how will that location help you increase sales?
- Promotions: What promotional methods will you use to attract customers to your tax business? For example, you might decide to use pay-per-click advertising, public relations, search engine optimization and/or social media marketing.
- Operations Plan – here you will determine the key processes you will need to run your day-to-day operations. You will also determine your staffing needs. Finally, in this section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years.
- Management Team – this section details the background of your company’s management team.
- Financial Plan – finally, the financial plan answers questions including the following:
- What startup costs will you incur?
- How will your tax business make money?
- What are your projected sales and expenses for the next five years?
- Do you need to raise funding to launch your business?
3. Choose the Legal Structure for Your Tax Business
Next you need to choose a legal structure for your tax business and register it and your business name with the Secretary of State in each state where you operate your business.
Below are the five most common legal structures:
1) Sole proprietorship
A sole proprietorship is a business entity in which the owner of the tax business and the business are the same legal person. The business owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.
A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a tax business together. The partners share in the profits and losses of the business.
The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.
3) Limited Liability Company (LLC)
A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a tax business include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.
4) C Corporation
A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a tax business is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.
5) S Corporation
An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.
Once you register your tax business, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.
4. Secure Startup Funding for Your Tax Business (If Needed)
In developing your tax business plan, you might have determined that you need to raise funding to launch your business.
If so, the main sources of funding for a tax business to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a tax business that they believe has high potential for growth.
5. Secure a Location for Your Business
When starting your own tax business, one of the first things you’ll need to do is find a location. There are a few things to keep in mind when choosing a location:
Make sure the location is accessible. You’ll want to make sure your clients can easily find and reach your business.
Consider your target market. If your target market is mostly local businesses, you’ll want to choose a location that’s close to those businesses. If your target market is online, you can choose a location anywhere in the world.
Think about your budget. You don’t need a fancy office space to start a tax business, but you do need to make sure the rent or mortgage is within your budget. You can always upgrade later, but start with a budget in mind.
Some of the most popular locations for tax preparation businesses are malls, strip malls, and office buildings. Make sure you check to see if there’s already a tax business in the location before signing a lease or rental agreement.
6. Register Your Tax Business with the IRS
Next, you need to register your business with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).
Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.
Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.
7. Open a Business Bank Account
It is important to establish a bank account in your tax business’ name. This process is fairly simple and involves the following steps:
- Identify and contact the bank you want to use
- Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
- Complete the bank’s application form and provide all relevant information
- Meet with a banker to discuss your business needs and establish a relationship with them
8. Get a Business Credit Card
You should get a business credit card for your tax business to help you separate personal and business expenses.
You can either apply for a business credit card through your bank or apply for one through a credit card company.
When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.
Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build your credit history which could be very important in securing loans and getting credit lines for your business in the future.
9. Get the Required Business Licenses and Permits
In order to start a tax business, you may need a business license, a professional license, and/or permits from the city or state. You can find more information on the requirements for your state through the Small Business Administration website.
10. Get Business Insurance for Your Tax Business
Types of business insurance policies that you should consider for your tax business include:
- General liability insurance: This covers accidents and injuries that occur on your property. It also covers damages caused by your employees or products.
- Professional liability insurance: This protects your business against claims of professional negligence.
Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.
11. Buy or Lease the Right Tax Business Equipment
To run a tax business, you’ll need basic office supplies like a computer, printer, and scanner. You’ll also need accounting software to help manage your finances. Finally, you’ll need a reliable internet connection to file taxes electronically.
12. Develop Your Tax Business Marketing Materials
Marketing materials will be required to attract and retain customers to your tax business.
The key marketing materials you will need are as follows:
- Logo: Spend some time developing a good logo for your tax business. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
- Website: Likewise, a professional tax business website provides potential customers with information about the services you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you.
- Social Media Accounts: establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your tax business.
13. Purchase and Setup the Software Needed to Run Your Tax Business
The most common software for tax businesses is tax preparation software. This software helps you prepare and file your clients’ taxes. It typically includes a variety of features, such as the ability to electronically file tax returns and print tax forms.
Some tax businesses use accounting software to manage their finances. This is especially common for those who have clients and employees and need help with bookkeeping and payroll management.
14. Open for Business
You are now ready to open your tax business. If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.
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How to Start a Tax Business FAQs
Is it hard to start a tax business?
It can be hard to start a tax business, but there are many resources available to help you get started. The most important step is to do your research and make sure you understand the requirements for starting and running a tax business. You can find helpful information on the IRS website. You may also want to consult with an accountant or lawyer who specializes in tax law.
In general, starting a tax business can be challenging, but is also highly rewarding if done correctly.
How can I start a tax business with no experience?
There are a few ways you can start a tax business with no experience. You could start by attending a seminar or workshop on taxation, or by reading books or articles about tax businesses. You could also get a degree in taxation, or start by working as an intern for a tax preparation company.
From there, you can choose to specialize in one area of taxation, such as individual taxes. You could then work your way up the tax preparation company, or start your own business. All it takes is some studying and effort on your part and on the part of any partners you choose to bring into the business with you.
What type of tax business is most profitable?
There is no definitive answer to this question, as it depends on a variety of factors, including the specific type of tax business, the location, and the size of the business. However, in general, tax businesses that specialize in consulting and advising clients are more profitable than those that offer filing services. This is because specialized tax consulting services are more complex and can often be billed at a higher rate.
How much does it cost to start a tax business?
To start a tax business, you will need to invest in some initial costs such as licensing, software, and advertising. The total cost to start a tax preparation business will vary depending on the size and location of your business. However, you can expect to spend between $1,000 and $10,000 to get your business up and running.
What are the ongoing expenses for a tax business?
The ongoing expenses for a tax business are typically the costs associated with the operation of the business. This may include expenses for advertising, office supplies, wages for employees and professional tax preparers, and continuing education. It is important for a tax prep business to keep track of these expenses throughout the course of the year.
How does a tax business make money?
A tax business makes money by helping people and businesses understand and comply with complex tax laws. Tax businesses offer a variety of tax preparation services including filing taxes, consulting on tax planning, and providing representation in disputes with the IRS. In addition to the fee for services, many tax businesses also earn income from commissions on products like software and financial planning tools.
Is owning a tax business profitable?
Owning a tax business can be profitable if it is run correctly. One of the main reasons for this is that there is significant demand for tax services. In addition, tax businesses can be relatively easy to start. Finally, tax businesses are recession-proof, which means that you can continue to make profits even during tough economic times.
Why do tax businesses fail?
There are a number of reasons tax businesses might fail. The most common reason is that the business is not profitable. This can be caused by a number of factors including not having enough cash flow early on, facing high competition in the market, and not understanding the target customer.
Another common reason for tax businesses to fail is poor management. This can include things like poor financial planning, poor marketing efforts, and hiring the wrong employees.
Finally, tax businesses fail due to legal issues. This might include things like violating state or federal laws, not filing taxes properly, or not paying taxes owed.