Introduction

As the world gears towards a more globalized economy, the physical boundaries between nation states effectively disappear, linking the rest of the world into one big global village. Human innovation and technological advances has made international transactions easier and quicker to accomplish. There is no doubt that the Internet has played a huge part in this global connectedness. 

The Internet is a fast and efficient medium employed to reach people all over the world in real time. No wonder commercial Internet ventures have been burgeoning to capitalize on the Internet’s boundless opportunities.

Choosing the Business Structure

The formation of web-based commercial ventures is similar to the formation of any other kind of business – which includes basic business decisions from pooling financial resources, deciding on what products and/or services to offer, marketing, strategic business planning, managing the business on a day-to-day basis, and more importantly, understanding tax considerations.

The first step is to determine which form of business structure is the most appropriate for your operations. Each structure has certain advantages and disadvantages that should be considered. The most common forms of business structure are outlined below.

Sole proprietorship is the simplest form of business organization to start and maintain. It is a business structure in which an individual and his or her company are considered a single entity for tax and liability purposes.

A partnership is the relationship when two or more persons run a business and share the profits in an agreed manner. Partners are taxed in a similar method to that of a sole proprietor. Each partner includes his or her share of the partnership's items on his or her tax return.

Partnership comprised of "general partners" and, in many cases, "limited partners." General partners manage the day-to-day operations of the business and are equally and fully liable for its debts. Limited partners invest in the partnership but have no management responsibilities and are liable for partnership debts only up to the amount they have invested.

Limited liability company (LLC), on the other hand, is a type of business structure in which the owners, called "members," enjoy limited liability for debts and taxes. The limited company is established to separate the affairs of the business from the personal affairs of the owners. The liability of the owners is technically limited to the amount of their share capital invested.

Corporation, the most common business structure, has many legal rights and is viewed as an entity separate from its owners. This separation limits owner liability for debts and taxes.

However, corporations are subject to double taxation. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends.

S Corporation is an eligible domestic corporation that can avoid double taxation. On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.

This is a corporation that has elected to be taxed like a partnership. Here there are no double taxation and limited liability.

Regardless of the individual nuances of your on-line business ventures, planning the business structure may require expert advice from lawyers, accountants, or from banks.

Record Keeping

Businesses should maintain the practice of good record keeping. Aside from being an effective way of preparing the filing of taxes, it also serves to:

Monitor the progress of the business.  Record keeping is necessary not only to record all of the accounting transactions, but also to monitor the performance of your business. Records can show whether the business is improving, which items are selling, or what changes are needed to be made.

Prepare financial statements.  Your business also needs good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. An income statement shows the income and expenses of the business for a given period of time. A balance sheet shows the assets, liabilities, and your equity in the business on a given date.

Identify source of receipts.  Records can identify the source of receipts which are needed to separate business from non-business receipts and taxable from non-taxable income.

Keep track of deductible expenses.  Expenses when preparing tax returns may be forgotten unless they are recorded when they occur.

Prepare tax returns.  Records must support the reported income, expenses, and credits. Generally, these are the same records that are used to monitor the business and prepare the financial statements.

Support items reported on tax returns.  Business records should be available at all times for inspection by the revenue service. A complete set of records will speed up the examination of the reported items.

Kinds of Records To Keep

The recordkeeping system adopted must clearly show the income and expenses of the company. It should include a summary of business transactions. This summary is ordinarily made in the books (for example, accounting journals and ledgers).

In addition, supporting documents must be kept for future reference. These documents contain information needed to be recorded in the books. It is important to keep these documents because they support the entries in the books and on the tax return. Keep them in an orderly fashion and in a safe place.

Supporting documents may include any of the following.

Gross receipts shows the income received from your business. You should keep documents that show the amounts and sources of your gross receipts. Purchases are the items you buy and resell to customers. Your documents should show the amount paid and that the amount was for purchases. These records will also help you determine the value of your inventory at the end of the year.

Expenses, on the other hand, are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include cancelled checks, cash register tapes, account statements, credit card sales slips, invoices, and petty cash slips for small cash payments.

Assets include the property, such as machinery and furniture you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets.

Other supporting documents include employment taxes, travel, transportation, entertainment, and gift expenses.

Penalties

The law provides penalties for not filing returns or paying taxes as required. Criminal penalties may be imposed for wilful failure to file, tax evasion, or making a false statement.

Other tax offences include:

• Failure to file tax returns by the due date. The penalty is based on the tax not paid by the due date.
• Failure to pay tax by the due date will accrue a penalty for each month, or part of a month, that your taxes are not paid. 
• Failure to withhold, deposit, or pay taxes. You may be subject to a penalty of the unpaid tax, plus interest. You may also be subject to penalties if you deposit the taxes late.
• Failure to follow information reporting requirements.   
• Failure to file the required and correct information returns by the due date.
• Failure to furnish the required and correct payee statements by the required date.
• Waiver of penalty will not apply if you can show that the failures were due to reasonable cause and not wilful neglect.
• Failure to supply taxpayer identification number or the taxpayer identification number of another person where required on a return, statement, or other document.